How to Calculate your Overhead Rate

Have you ever contemplated the true cost of a sale for your business?

A good way to do that is to calculate your overhead costs.

Let’s say you provide computer repair services.  Think about all the costs of providing your repair services.  You have your time, and the mileage costs to get you to the customer, and the cost of whatever part or equipment they need installed or replaced.  But what about your overhead costs?

What is overhead you ask?

Overhead is all the costs of doing business that are not directly associated with your product or service. Some examples of overhead costs would be:

  1. Rent
  2. Administrative/office personnel payroll
  3. Utilities
  4. Advertising
  5. Accounting / Legal costs
  6. IT Services
  7. Supplies

Let’s dissect the costs for the computer repair service company.

 

First, there’s the direct costs of providing the service, then there’s the indirect costs, or overhead.

Direct Costs:

  1. Direct Labor – you and/or employees who directly work on the computers
  2. Direct Materials – the parts/equipment you hook up/replace
  3. Freight – travel costs you incur getting to/from the customer

Indirect Costs:

  1. Rent of your storefront/office space
  2. Heat/electric/phone/internet for your store/office
  3. Payroll for any office personnel
  4. Advertising costs
  5. Accounting/legal costs
  6. Dues/subscriptions to trade publications/organizations

 

To figure out your Overhead Rate, you add up all your Overhead costs – estimated – for a year.  Let’s say they add up to $100,000.

Next, estimate the total number of labor hours available to work.  If you are the only worker, and you work 40 hours a week for 50 weeks a year, that’s 2000 hours.

 

Take your total Overhead Costs divided by your total Labor Hours to get your Overhead Rate.

In the example here, that would be $100,000 / 2,000 hours = $50 per hour.  If you have one employee besides yourself who works the same 40 hours for 50 weeks a year, you would add your 2000 hours/year and the employee’s 2000 hours per year to get the total Labor Hours.  The calculation would be $100,000 / 4,000 hours = $25 per hour.

 

Let’s say you send your employee to a customer’s place of business to install a computer and get it working.

You have Direct Costs:

Costs of Computer $600
Labor Costs $  50  1 employee for 2 hours at $20/hour + benefits
Travel $  20  40 mile round trip at $0.50/mile
Total Direct Costs $670

 

And you have Overhead:

2 hours at $25/hour $  50
TOTAL COST OF SERVICE $720

 

 

Add the Direct Costs and the Overhead to get your Total Cost of Service.

 

Now, make sure your billing rate is more than your cost and you will make a profit.

 

The important thing to remember about your Overhead Rate is that costs change.  Prices go up.   Try to keep your costs stable.  It’s also a good idea to periodically recalculate your Overhead Rate to make sure you are charging enough to cover your costs and earn a profit.

7 simple tools for a basic accounting analysis of your business.

 

Here are 7 simple, commonsense ways to keep your business healthy.

A basic accounting analysis will show you what kind of shape your small business is in.  There are a lot of ways to do this. Some business owners use their checking account balance as a guide. Others let the bottom line on their Income Statement do the talking. The truth is, you should monitor several accounting basics to keep your business on track.

accounting analysis

Here are 7 basic accounting analysis tools to use to monitor your business.

1. Balance Sheet
Let’s start our basic accounting analysis with the Balance Sheet. This financial statement gets ignored by a lot of small business owners, but it’s a very important tool.

What is on a basic accounting Balance Sheet? Assets, Liabilities, Equity. Remember this equation:

Assets – Liabilities = Equity

Put simply, this means what you own minus what you owe is your business net worth. If you owe more than you own, you end up with a negative net worth. Not good.

But there’s more to a simple accounting analysis then just looking at this equation.

The Balance Sheet also shows you more details, like how much cash you have, how much customers owe you (accounts receivable), how many bills you owe (accounts payable), how much you owe in loans, and how much your business has earned up to now (equity or retained earnings).  It also shows you if those figures are increasing with time or decreasing.

2. Cash Balance

Your cash balance is on your Balance Sheet, but it bears digging into.  How much is in your checking and savings accounts? Cash is vital to your small business health. You can’t survive without it.  If you have to keep borrowing, your debt will overtake your assets, and your net worth will disappear. And banks don’t like negative cash flow. So monitor your cash balance.  Reconcile your bank statement every month. Know when your business cycles up and down, and plan ahead to make sure you have the cash you need to move ahead.

3. Income Statement

The next step in your basic accounting analysis is to take a look at your Income Statement each month. Your Profit is your bottom line. But it’s so much more than that. Your basic accounting analysis should dig deeper than just your Profit or Loss number.

Look at your total revenue and total expenses. Are they increasing or decreasing? Ask your accountant for a comparative Income Statement. This shows the comparison of this month and this year to date with last year, this month, and last year, year to date.

That way you can see at a glance what expenses are increasing, for instance. If you’re doing financial statements yourself, just keep copies of your Income Statements, and lay last years next to this years, and compare.

4. Statement of Cash Flow

This financial statement is another step in your basic accounting analysis. It takes the change in your cash balance for a time period, usually a year, and dissects that change into 3 areas – operations, financing, and investments.  From this statement you can see whether your business is holding its own just from operations, or needs influxes of cash from sources outside day to day operations to keep afloat.

Let’s say you have a $50,000 increase in cash for the year. Great, right? Maybe. Maybe not.  Look deeper. If most of that increase came from operating activities (day to day operations), that is great. But if it came from financing activities (loans) or investing activities (liquidating investments) then it’s not so great. Your operations should provide your cash flow.  So this statement should be prepared at least at the end of every year. Make it part of your accounting basics.

5 – Employee Turnover

Another part of your basic accounting analysis is taking a look at your employee turnover. Do employees stay a while or leave right away?  Certain employees are a very important part of your business. They may be the ones greeting customers, or helping customers on the phone, buying your materials, or selling your product. The longer they work for you the more wealth of knowledge they have, the more your customers count on them, and the harder they’ll be to replace. Each new employee needs training. That takes time and money. In some businesses, your employees are your business.

If you have trouble keeping people, find out why and rectify the problem. You’ll save money in the long run. And remember, you’re employees are out there talking about you. Make sure it’s positive!

6 – Supplier Relations

How well do you get along with your suppliers? When you need something in a pinch, are they willing to work with you or do they not return your phone calls?  No basic accounting analysis would be complete without looking into the strength of your supply chain. Make sure you pay on time, and take a little time to develop a personal relationship. You don’t have to be buddies, but make some time for those sales reps. If they know you, they’re more apt to go to bat for you in a pinch to get what you need.

7 – Customer Relations

Last on my list, but certainly not any less important, is customer relations. How are your customers? Do they come back for more? Do they send their friends to you? Are they angry or happy with you?  This is an important part of your basic accounting analysis because there is no business without customers. There is no sales income without customers.  Again, word of mouth is the greatest advertising. Make sure your customers are happy and giving you the thumbs up to their friends and business associates.  Keep in touch with them, and let them know how important they are to you.

 

These 7 tools are simple, commonsense things, but if handled well, they will help your business grow and be successful.

If you have positive net worth, a decent amount of cash in your checkbook, a profit, great employees that stick with you, suppliers ready to back you up, and customers raving about you, how can you go wrong?

And if you don’t have all these things? Find out why.

It’s a good idea to take a good look at all these items on a regular basis. Nothing about business is static. It’s always changing.  Spot problems when they’re small and more easily and quickly fixed.

What paperwork to keep, and for how long.

This is a question many small business owners ponder.  What to keep and for how long?

Documentation is a word we accountants use that means paper backup for each sale or expense that you report.  It could be a receipt from a store, an invoice copy, or an email receipt for a purchase.  Whatever the business transaction, you need documentation.  This is a very important piece of small business accounting.

If the IRS ever came calling, any expense without proper documentation could be denied. So, yeah, it’s important.

In a previous post, I discussed setting up files for your small business.  Check out that post here.  I talked about Current Files and Reference Files.  Current Files are things you work with every day, or at least weekly, like payroll information, quotes, purchases, deposits, sales invoices, etc.  Reference Files are for information you only need occasionally, things like loan paperwork, contracts, employee files, vendor files, etc.

It’s important to keep your business paperwork together, and in some kind of order where you can find it as you need it.  So whether you’re just starting a business or have been in business a while, an organized office will help you focus on your business.

small business accounting

 

The main thing to remember when thinking about what paperwork to keep and for how long is that you want to prepare accurate, well documented financial statements, and you want backup (documentation) for all revenue and expenses for your tax return.

That’s the point of a good office management system. When your office runs smoothly, and everything you need is at your disposal (meaning you don’t have to root around for days looking for something) you will feel freer to focus on actually running your business, not your desk.

This is also a good argument for using a bookkeeping service.  Letting someone who knows accounting handle your books will take that load off your shoulders and free you to spend more time bringing in revenue.  If you need help, give me a call.  Or check out my website here.

So here’s a list of what you should be keeping in your files, and how long to keep it.

 

Keep the following for 3 to 7 years:

**sales invoices, deposit slips and receipts

**copies of bills or receipts for purchases, as well as credit card statements. Remember that many receipts are made with heat transfer paper, and fade over time. Consider photocopying them for longevity.

**bank statements

**inventory counts

**basic accounting reports you print out for each month. You should be printing or storing a copy of your cash receipts journal, cash disbursement journal, payroll journal, sales journal, accounts payable and receivable journals, and your general ledger and financial statements.  If you aren’t sure what these journals are, you should definitely think about hiring a bookkeeping service.  Give me a call and let’s see how I can help your business be more profitable.

 

Keep the following as long as you are in business:

**tax returns – as well as any correspondence with your tax preparer, and any taxing authorities, too, be it the IRS or your state and local tax department.

**dealings with attorneys, and any legal documents or lawsuits.

**payroll information, including payroll taxes and W-2 forms – you never know when you’ll need something in there, trust me.

**employee benefit information

**loan agreements, lease agreements

**receipts and paperwork on any asset purchases , including furniture, computers, cars, buildings, or equipment, as well as any building improvements.

 

When setting up your office filing system, I suggest you keep your current year and last year paperwork somewhere within arms reach. I try to keep the current year in my desk or close by, and last year in a file drawer nearby. Get some file boxes and keep previous years in another file cabinet or a closet or storage room. You may need to access it but not often.

office management

 

With a firm idea of what small business accounting info to keep and for how long, you should be all set.  If you’re keeping paper files, be sure they’re in a secure location, preferably in a locked filing cabinet.  If you keep stored documents on your computer, make sure you back up often and have your computer set up with a strong antivirus and malware protection.

 

 

Employee Payroll Forms

 

If you’ve decided to hire employees, you’ll need employee payroll forms.  But which do you need?

Payroll Forms are the forms you have your employees fill out upon hire. These forms are to prove eligibility for employment, to set up their employee payroll taxes and to set up their employee benefits.  This is the next step in learning how to do payroll.

 

Employment Application Form

The first payroll form you need is an Employee Application Form. This form can be purchased or downloaded, and contains an employee’s personal information, employment information, and references.

 

Form W-4

Available at the IRS website, the IRS Form W-4 tells you how much federal withholding tax the employee wants taken out of their pay. This employee payroll tax is based on wage and number of exemptions. On this form your employee will mark Single or Married, and then fill in the number of exemptions they have.

For example, most Single people enter S for Single, and 0 for no exemptions, or 1 for one exemption. Single-0 is the highest level of withholding. Single-1 would be a little less tax withheld. If they are unmarried with children, the number of exemptions would increase by number of children. Beware when you see Single-8. Question that. Keep this form in your employee’s file.

 

Form I-9, Employment Eligibility Verification

This payroll form is available at the website for the U.S. Citizenship and Immigration Services. This form is required to show proof that the employee is authorized to work in the U.S. Make sure you read this form before handing it to someone to fill out. The employee fills out the first section and signs, then you fill in your company info and sign.

You will need copies of documentation, such as a driver’s license and social security card along with the completed form. There is a complete list of acceptable identification with the form. This form is not to mail anywhere, keep it in your files. There is a penalty if they come knocking and you don’t have the form.

 

State Withholding Forms

This employee payroll form will vary by state. In Ohio, we use a Form IT-4, Employee’s Withholding Exemption Certificate. Go online for your state, and find the area on the site for Employers. You should find a comparable form that the employee will fill out and tell you how much state tax to withhold.

Actually, they enter how many exemptions they want to claim. You will be looking on a tax table provided by your state under that number of exemptions to find out how much tax to withhold. More on this later.

You should also find Withholding Tax Tables on that website, too. Print out a copy.

 

Benefits Application Forms

Your benefit providers, such as your medical or dental insurance provider, disability insurance provider, life insurance provider, or the firm that handles your 401k-retirement plan, will give these payroll forms to you. If you don’t have any of these benefits yet, don’t worry about it until you do.

If you engage a firm to provide these benefits, and they talk to you about a Sec. 125 cafeteria plan, say for disability or sick pay benefits or a medical savings plan, think twice about it. A cafeteria plan is a benefits plan that is set up with the IRS to be a pre-tax deduction for your employees.

It requires a year-end tax return, and has to be monitored by someone who knows what they’re doing, which means you pay fees to a firm to handle this. Some people feel these plans are great for the employee. But you need to weigh the costs of setting up and maintaining the plan against the small tax benefits to the employees.

 

Since you’re collecting all these forms for each employee, now is the time to set up employee files.

 

Payroll Forms to keep in your Employee Files

 

Employee Files

This is an important step in learning how to do payroll. These files are very important, both from a tax standpoint, and a legal standpoint.

  • employment application form
  • payroll tax withholding forms
  • employee benefit application forms
  • non-compete agreements
  • testing results

Keep these files up to date.

Regarding benefits, you may want to print out information on your company and keep these in a folder to give new employees.  Things like:

  • vacation/sick pay rules
  • hours of operation
  • medical/dental/life insurance information
  • 401k pension plan info
  • any disability insurance
  • credit union affiliation

Give your employees one of these packets when you hire them. Sort of a ‘welcome to the firm’ packet.

In the next blog post in this series of how to do payroll, I’ll talk about actually calculating some payroll.

Payroll

If you’re thinking of adding employees to your small business, it may seem like a daunting task, with the myriad of regulations out there.  Let me try to explain the payroll process for you.  Here’s what I’m going to cover:

  • gross wages and net wages
  • employee vs independent contractor
  • Employee payroll taxes
  • benefit deductions

Employee payroll taxes are federal and state taxes that the employee pays. These are deducted from your employee’s wages each pay.

But when we’re talking about how to do payroll, and trying to calculate payroll, there are many pieces to this puzzle, not just taxes. Gross wages, employee payroll taxes, employee benefit withholdings, and net pay are the main pieces or parts of an employee’s pay, and we want to discuss them here.

 

Payroll by section

In order to fully explain the “how to calculate” part of how to do payroll, I will explain the different sections or parts of your small business payroll.

 

You have:

**Gross Wages (hours worked x hourly wage)

**Federal Taxes (federal withholding, social security, medicare)

**State and Local Taxes (vary by locality – state, city, school tax, etc.)

**Benefits withholding (employee’s share of medical/dental benefits)

**401(k) contributions (employee contributions to a pension plan)

**Child Support withholding (payments to your local child support agency)

**Net Pay (what’s left!)

 

Whew! That may seem like a lot, but once you get the hang of it, it’s not that hard, really!

Now let’s go thru each of those parts.

 

Gross Wages

Think of gross wages as meaning ‘without any deductions’.

Gross wages can be broken down into many subcategories, like hourly, overtime, vacation, sick, salary, commission, etc.

 

Hourly vs Salary vs Commissions

If an employee is Hourly, the get paid a set hourly wage, for example, $10 per hour, and they get paid for the number of hours they work. You must abide by the federal and state minimum wage laws, so make sure to go online to the Department of Labor website for up to date minimums.

If an employee is Salary, they get paid a set amount each pay period. A salary is usually stated in an annual form, such as $30,000 per year.

To figure out a weekly pay on an annual salary, take the salary divided by 52 weeks/year. For $30,000, that calculation would be $30,000 / 52 = $2500.

To figure out a bi-weekly pay (every other week) take $30,000 / 26 (52 weeks divided by 2).

To figure out a semi-monthly pay (15th and 30th) take $30,000 / 24 pays/year (twice each month).

If an employee gets paid on Commission, that means they earn a percentage of the sales they bring in. Insurance, Auto and Real Estate industries pay this way, among others. Commissions are usually paid monthly, after you’ve had a chance to calculate your sales, and then calculate the employee’s percentage.

 

Independent Contractor vs Employee

A word of caution here. Many times small business employers want to pay an employee as an independent contractor, thinking they can sidestep the whole employee payroll taxes issue all together.

The IRS has 3 categories of information they use in determining if a worker is an employee or an independent contractor.

1. Behavioral – who controls what the worker does and how the worker does it? If you control when they work and what they do and how they do it, they’re an employee.

2. Financial – how is the worker paid? Are expenses reimbursed? Who provides the tools or supplies needed to do the job? If you pay them by hour on a regular basis, reimburse them for expenses incurred, and supply all the tools and supplies, they are an employee.

3. Type of Relationship – Is there a contract? Are there benefits (pension, insurance)? Will the relationship continue? Is the work performed an integral part of the business? If you’re answering yes, you have an employee.

If you treat an employee like an independent contractor, you could, if caught by the IRS, be liable for back employment taxes. Don’t chance it. Do your small business payroll by the books, and you will sleep well at night.

 

Employee Payroll Taxes – Federal Taxes

There are 3:

Federal Withholding Tax

This employee payroll tax is based on the gross wage and the number of dependents (exemptions) that an employee claims on their Form W-4. There are tax tables online at http://www.IRS.gov, but they are also in the IRS Circular E (booklet). You will get this booklet full of information on how to do payroll from the IRS when you get your EIN.

If an employee makes a large wage, you may have to calculate the withholding, as the tables only go up to a certain level, then the percentages take over.

 

Social Security Tax

This employee payroll tax has two parts, the employee portion, and the employer portion. You each pay 6.2% of the gross wage. The employee pays their share out of each paycheck. You the employer then add your percentage to the employee’s percentage, then pay that to the IRS on a regular basis.

 

Medicare Tax

This tax also has two parts, employee and employer, the same as above, only the percentage is 1.45% of gross wages.

 

ASIDE: 941 Tax Deposits

Quite simply, each pay period when you do payroll you add all the federal withholding taxes for all your employees, add to it all the employee’s share of Social Security tax and Medicare tax, and then add to that all the employer’s share of Social Security and Medicare tax. This amount is deposited to the IRS. It is called a 941 Deposit.

This is either monthly (you pay the IRS each month) or semi-monthly (you pay the IRS on a set date after your pay date. This is all explained in the Circular E you will receive from the IRS. For example, though, if you do payroll on Friday, you must make your 941 tax deposit by the following Wednesday. You can pay this tax at a bank, online, or over the phone. This is called EFTPS, the Electronic Federal Tax Payment System. You have to sign up for this, so go online to http://www.IRS.gov, then search for EFTPS.

 

Employee Payroll Taxes – State and Local Taxes

Each state will have the following employee payroll taxes or variations of such:

 

State Withholding Tax

This employee payroll tax is the state version of the federal withholding tax. Again, the employee designates how many dependent exemptions they will claim, and you use a tax table to figure the correct withholding, based on the gross wage and number of exemptions.

You will pay this to your state either monthly or quarterly, based on the size of your payroll.
Local Withholding Tax

This employee payroll tax is a local tax that the employee pays based on their gross wages. This could be an employment tax (because they work there) or a residential tax (because they live there). An employee could be hit twice if they live in a city with a residential tax, and work in a different city with an employment tax.

This is paid monthly or quarterly, again depending on the size of your payroll.

 

School District Tax

This employee payroll tax is a local tax for the benefit of the local school district, and is voted into passage by the residents. This will be a percentage of the employee’s gross wages. You should be able to find this thru your State website. I know Ohio School District Taxes can be located thru the Ohio Dept of Taxation website. This is paid, yep, monthly or quarterly, based on the size of your payroll.

 

Employee benefits withholding

Benefit withholding is similar to an employee payroll tax in that you are required to withhold a certain amount from the employee’s pay, and remit that amount to an outside party.

The benefits that most employers provide are medical insurance, dental or eyeglass insurance, life insurance, and some sort of disability insurance.

To start such a program, you need to call around to different insurance agents, and get some quotes.

You do have some options regarding payment.

You can:

Provide employer-paid coverage (you pay it all) Provide partially paid coverage, and ask the employee to pay a set amount per month Provide the medical coverage for the employee, but have them pay dependent coverage Provide medical coverage, but ask the employee to pay any other coverage they want.

401(k) Contributions withholding

401(k) plans are retirement plans that the employee contributes part of their wages to each payroll. The employee specifies what percent of their wages they want to contribute, usually anywhere from 1% to 10%.

You as the employer then subtract (withhold) from the employee’s gross wages that percentage, say 5%, then you cut a check for that amount and send it to the company you wrote your plan with (your plan administrator).

This is the essence of “withholding”. You withhold from the employee’s gross pay, then you send that money somewhere else, be it the IRS, the state or locality, or your benefits administrator.

 

Child Support withholding

 

Child Support wihholding is a highly regulated area now. This is not an employee payroll tax but it is a regulated withholding. Usually the county Child Support Enforcement Agency (CSEA) will send you a notice in the mail. They will tell you how much to withhold for your employee based on the amount due and how often you pay your employees.

This money should be sent in to the CSEA the day you do payroll. You are allowed to withhold a small fee, I think it’s either $2 or $5 per pay (the notice will tell you) to cover your costs in this process. I never did, but it’s up to you.

 

Net Pay

Net pay is what’s left after you deduct all these deductions from the employee’s gross wages.

This is the amount that goes on the employee’s pay check.
So you take Gross Wages, minus all the employee payroll taxes – Federal Withholding Tax, Social Security and Medicare Taxes, and State and Local Withholding Taxes – and minus any Benefits withholding, 401(k) Contributions, or Child Support withholding.

That’s Net Pay.

 

The next discussion will be on Employer Payroll Taxes, like social security and unemployment taxes.

Computerized Accounts Payable

When your business gets larger, or if you’re more of a Techie type, it might make sense to step up to an accounting software package.

It’s relatively easy to set up a computerized accounts payable system, and it automatically does all the posting to journals and ledgers for you.

There are plenty of simple accounting software packages out there, from QuickBooks to Peachtree to Zero and more. You can easily purchase and install one of these packages on your computer for your business.

computerized accounts payable

Who should use a simple accounting software package for their small business?

If your business is on the large size, or you have several employees, or you need to track more information than the manual worksheets and journals give you, a computerized system will definitely help you out.

Using a computerized accounts payable system will help you stay organized and keep track of more small business accounting info than using a manual system.

A computerized accounts payable system will:

**hold all your vendor information, so you don’t have to enter that information when writing checks

**enable you to pay bills and print out checks right on the computer

**post your check to the correct account in your chart of accounts, all you do is enter the account, i.e. Telephone Expense.

**track all payments to each vendor, so you can pull this information up at any time.

**tell you what bills are due on any given day.

 

How does computerized accounts payable work?

The exact specifics depend on the brand of simple accounting software you decide to use, but I’m going to give some general guidelines here.

The first thing you need to do is “set up” your computerized Accounts Payable system.

How?

First, you need to set up your Chart of Accounts. The software package should have a few options for you, based on your type of business. If not, check out my sample Chart of Accounts, which you can use as a starting point.

Now you need to set up your Vendors. Gather up all your bills from last month. Under the Vendors section, there should be an Add feature. Add your vendors one at a time, inputting the name, remit to address, phone and fax numbers, email and website info, and any account number or contact info you may have.

NOTE: if the vendor is not a corporation, you may want to collect their Federal ID Number (or Social Security Number – be sure to keep it safe!  I would suggest not putting it into the software) because you will need this information at year end for your CPA to file 1099 Forms. These are like a self-employed Form W-2.

Now that you have the initial information in the computer, you can enter your bills.

A computerized accounts payable system makes use of vouchers and checks to post and pay bills.

What is a Voucher?

Remember, a bill is a Liability (something you owe). When you enter your bills into the computer, you will enter them onto what is called a Voucher. What is that? When you think of the term voucher, you think of a promise to pay, right? That’s what we mean, here. You will pay this “voucher” at a later date – the due date of the bill.

So you will enter your bills, and the computer will automatically post them to a liability account titled Vendor Payables, and it will enter them in the correct account in your Chart of Accounts based on what you entered on the Voucher, like Telephone Expense or Office Supplies Expense.

Then when you pay the bills and print out checks, the computer automatically takes that amount out of the Vendors Payable account and out of your Checking Account.

This is all done behind the scenes, so to speak. You don’t have to worry about it, trust me, your computerized accounts payable system takes care of it. I just want you to know what is happening behind your screen, so you will understand the process.

Entering a Bill

On your computer, you should have a section titled Vendors, and you should have an option to Enter a Bill.

Click there, and you should have a Voucher open on your screen. Take your first bill, and enter the required information – vendor name (you should have a drop down list to choose from) – date of the bill – amount of the bill – due date – account (you should have a drop down list here too, your Chart of Accounts, to choose from).

That’s it. Go on to your next bill.

On the software main page, there should be a list of reminders, one of which is Bills that are due. You can also run a Vouchers Due report, or Bills Due, that will list them all out for you at any time.

In the Vendors section, there should be an option to Pay a Bill. You can pick one bill or choose all that are due, and print the checks all at once.

When I enter my bills, I keep a “Bills Due” file folder in my current files, and then when I pay them, I have a “Paid Bills” file folder (several, actually!) in my reference files.

Accounting File Management

Keep these paid bills for 3 to 7 years to back up your deductions on your tax returns.

So that is all there is to a computerized accounts payable system. Take your bills, enter them into the software (a Voucher), then pay the bills by printing out your checks. You can track what bills are due when by pulling up a report on your screen.

If this all sounds like a bit more than you can handle, what with all the other hats you’re wearing as a small business owner, you may think about hiring a bookkeeping service.  And don’t think that means your books will be taken out of your hands.  With QuickBooks, there’s an ‘accountant’s copy’ that can be shared between you and your bookkeeping service.  So you can do as much or as little as you want to, and then hand it over to an accountant to go over and make corrections, or actually enter bills and deposits for you.  Then they will send it back to you so you will have the updated version of your books.

Check out my website for more information on me and my services.  Let me do what I’m passionate about, and free you to do more of what you’re passionate about.  I’m sure you’d rather concentrate on sales and your customers than paying bills.

Accounts Payable

Paying the bills for your Small Business

Accounts Payable is the accounting term for all those pesky bills that you have to pay.  It’s a liability account in your Chart of Accounts. Other terms commonly used are Vendor Payables or Trade Payables.

accounts payable checkbook entry

Incurring bills is a part of every small business accounting system, and the bills are as varied as the businesses we all run.

However, not all of these bills are considered Accounts Payable.

 

Remember your Chart of Accounts? Your liabilities consist of –

**your Accounts Payable

**any credit card balances you are paying on each month

**any loans you have, be they mortgages or auto loans

**any lines of credit

These loans, or Payables, will have their own account in your Chart of Accounts. For example, Capital One Payable, Mortgage Payable, Vehicle Loan Payable, or Fuzzy Bank Line of Credit Payable.

 

accounts payable files

What is included in Accounts Payable?

The following are included:

a. utilities – electric or gas payments

b. phone bills

c. internet service bills

d. payments due your accountant or attorney

e. repair bills

f. office supplies purchased on credit

g. payments due any subcontractors

h. rent payments

i. credit card payments if you pay the balance in full each month

j. advertising bills

k. equipment lease payments

l. any maintenance agreement payments

m. insurance payments

n. freight bills

o. subscriptions or dues

p. purchases of products or materials used in your business

 

Accounts Payable (A/P) is the account to place (accounting term is POST) any bill you’re not going to pay right now. Anything purchased on credit or paid on a regular basis is a candidate for your A/P system.

If a subcontractor hands you a bill and you cut him or her a check right there, don’t bother with A/P, just post the check to the appropriate expense account.

But if you aren’t going to pay the bill right away, post the bill to the expense account and to A/P.

JUST WHAT IS POSTING?

Just briefly, let me explain the “posting” process. Whether you use a manual system or a computer system, when you write a check or enter a bill in your basic accounting software you will be coding it.

This code is an account in your Chart of Accounts, like Office Supplies or Subcontractors or Repairs & Maintenance.

Remember the Accounting Cycle? Activity leads to transactions which lead to entries in journals which lead to financial statements.

Posting is the “entries in journals” process. That code that I mentioned is the account in your Chart of Accounts that you post to, and it determines which financial statement the transaction shows up on.

Just real quick (more details on this later) your Balance Sheet shows your assets, liabilities, and equity (ownership), and your Income Statement shows your revenue and expenses.

 

Back to paying your bills…

 

You can keep a Manual small business bookkeeping system, and file your bills in a paper folder and do this coding as you write checks.

 

Or, if you use a computer, you can use a Voucher System, and record your bills in your computer’s accounting software system and then pay them later thru your pay bills feature.

Check out my post on using a manual accounting accounting system.

 

Or check out my post on using a computerized accounts payable system.

 


 

If you have QuickBooks, but haven’t quite gotten the hang of it, check out my training manual “Getting Started with QuickBooks”. It shows you – with text and screenprints – how to enter a bill, how to pay a bill, how to write a check, how to invoice a customer, and how to post a payment from a customer. All in an easy to understand step-by-step manual. Click here for more on “Getting Started with QuickBooks”

 

Need some help setting up a simple bookkeeping system?  Want to save money by doing it yourself?

Check out my e-course, Keep Your Own Books!  It’s available here.

Using a Cash Disbursements Journal

 

A Cash Disbursements Journal is simply a listing of all your cash payments for a specified period of time, say a month.

It’s a part of basic accounting, a book of original entry to capture your cash transactions.

If you’re using an accounting software package like QuickBooks, the computer automatically prepares a cash disbursements journal based on the checks you write thru the software.

But if you’re using a simple manual accounting system, it’s really not that hard to do it yourself. In a manual system, your cash disbursements journal is your record of expenses for that month (or quarter or year). This can be handed off to your accountant to use in preparing your income statement. Or you could prepare an income statement yourself.

Let’s take an example. All you need is Microsoft Excel, which is what I used in the example below, or you can use a simple pad of 13-column accounting paper.

Let’s move right into an example.

Cash Disbursements Journal example.

cash disbursements journal, accounting journals

This cash disbursements journal was made in Excel, but it could easily have been made using the 13-column accounting paper. If you are just opening a small business you want to keep things simple and inexpensive.

The information we’re trying to capture in this accounting journal is the date, amount, and purpose of each cash disbursement, be it a check or an ACH transaction thru your bank.

In the example above I’ve got a column for the check number, date, name and description, and amount. Then there are columns for expenses you use frequently, like supplies, rent, utilities, etc.

Then at the end of a month, or if your small business is really small, maybe a quarter or a year, you will total all the columns. See the above example. These totals will become your expenses for the month on your Income Statement.

Let’s take it up a notch, and add some more information.

Let’s assume we’re opening a small business, let’s call it Sallie’s Corporate Gift Basket Supply.

We’ve started a simple manual cash disbursements journal like the one above, but we want a little more information on our disbursements. We’re making gift baskets, so we want to add a column for “materials”. And, we want to know which job we’re purchasing materials for.

Let’s see what that would look like…

accounting journals

This example is just like the first example, but look at the right hand side. We’ve added 2 columns, one for the amount of materials purchased, and one for the appropriate job number. If one purchase is for more than one job, we’ve split it up.

This way, at the end of a month we can add up the materials by job number, and know how much we’ve spent on each job.

As you can see, accounting journals can be very helpful by giving us the information we need in one convenient place.

However, this does take a bit of time.  And if you’re trying to market your business, service clients, and keep the books too, it may make sense for you to outsource your accounting.

If you need help setting up a small business accounting system, give me a call.  I provide bookkeeping, payroll, and accounting consulting services.  Check out my home page for more information on the services I provide.

Using a Cash Receipts Journal

Use this accounting journal to summarize
your receipts and track your customer payments.

 

A cash receipts journal is a basic accounting book of original entry that lists out your sales dollars received for a given month (or quarter or year).

If you are using an accounting software package such as QuickBooks, the software does the posting into an accounting journal automatically.

If you are just starting a small business or running a part time business, you may want to use a simple manual system, and you can do this easily yourself with Microsoft Excel or a simple 13-column pad of accounting paper, like this.

accounting journal

 

The example we’re going to look at first is a simple cash receipts journal for a small business. It will show us a lot about monies received.

Take a look:

Cash Receipts Journal example

accounting journal

For the columns, we’ve used the date, who the money was from, the invoice number being paid, and the amount of payment. Then we’ve added a few columns for our specific business use. In this example we fix cars, so we want to break our income into these categories – supplies, parts, labor, and miscellaneous.

If you were a caterer you might want to break your income into main dish, appetizers, drinks, etc. Or wedding, reunion, birthday, etc.

This is strictly your call, there is no right or wrong way to categorize your sales. You may want to lump together all the types of income and break it out by location instead. It all depends on how you want to see your income.

So we can add more detail to our cash receipts journal if we want to.

Take a look at this:

starting a small business

This cash receipts journal gives us more detail about our customers as well a breakdown of income by type of income.

We’ve added columns for each customer, so at the end of the month (or quarter or year) when we total our columns, we not only have the total income received, we also have the total income received from each customer, as well as the total attributable to supplies, parts, and labor. Or whatever income detail you’ve chosen to break out.

In your Cash Receipts Journal, you could use any categories you’d like to track. Maybe you have 2 stores – you could separate by store location. Or you could use salesperson as a category – and track sales per salesperson (if you don’t have too many, that is!)

You could also track payment type – cash, credit card, check. Or track sales by referral method – website, in-store, flyer, newspaper ad, etc.

There are just as many ways to track your sales as there are small businesses.

This is a simple, useful way to summarize income received, but also to analyze your income in a way that will help you run your small businesses.

If you’re just starting a small business, give some thought to what types of income you may have, and don’t be afraid to change your categories if you find a way that’s more useful to you.

Your journal can also be used to track customer payments. Throughout the month, as you post payments received, you could look thru your journal and make a tick mark next to the invoices being paid.

Then, every week or so, look for invoices from last month with no tick marks. Those invoices are unpaid, and may need a reminder invoice or a phone call.

Accounting journals like the cash receipts journal we talked about here, and the cash disbursements journal are just one piece of a simple, basic accounting system that anyone starting a small business can set up. And you can use these journals to tell you more about your business.

Sample Chart of Accounts

What is a Chart of Accounts?

It is a list of all the accounts you will be using for your books.  An account is a place to hold like transactions together.  For example, the account called Cash is for all cash activities, the account called Sales is for all sale activity, and the account called Utilities Expense is for all phone, heat, and light cost activity.

An account can be one of 5 designations:

  1. Asset
  2. Liability
  3. Equity
  4. Revenue
  5. Expense

Sample Chart of Accounts

Here is a sample of a Chart of Accounts you can start with when setting up your small business bookkeeping.

If you are going to use Quickbooks, or some other basic accounting software, the software has sample Chart of Accounts you can choose from based on your business type.

 

Sample Chart of Accounts by Account Type

 

Assets

Current Assets

**Petty Cash

**Business Checking Account

**Business Savings Account

**Accounts Receivable

**Inventory

**Undeposited Funds (this is a QuickBooks account – part of the deposit posting process)

Fixed Assets

**Equipment

**Furniture & Fixtures

**Buildings & Improvements

**Vehicles

**Accumulated Depreciation

Other Assets

**Notes Receivable (money paid out to owners, etc.)

 

 

Liabilities

Current Liabilities

**Accounts Payable

**Credit Cards Payable

**Payroll Taxes Payable (FICA/Federal Withholding, State & Local Withholding)

**Sales Tax Payable

Long Term Liabilities

**Note Payable – Vehicle Loan

**Note Payable – Mortgage Loan

**Note Payable – Owner

 

Equity

 

For a Sole Proprietor:

**Capital (the owners equity in the business)

***Contributions (sub-account for additional money put into the business)

***Draws (sub-account for money taken out of the business)

For a Partnership:

**Capital – Owner 1

***Contributions – Owner 1

***Draws – Owner 1

**Capital – Owner 2

***Contributions – Owner 2

***Contributions – Owner 2

For a C-Corporation:

**Capital Stock (actual stock issued to the owners)

**Retained Earnings (accumulation of the business profit or loss from year to year)

**Dividends (moneys taken out of the business and dispersed to owners)

For an S-Corporation:

**Capital Stock

**Retained Earnings

**Distributions – Owner 1 (same as dividends above, but separated out by owner)

**Distributions – Owner 2

 

Revenue

(what accounts you have here will be determined by your type of business) – – – for this example, let’s assume you run a vehicle repair shop – – –

Sales

**Services

**Parts / Products Sold

**Sales Returns

Other Income

**Interest Income

**Other Income (depends on your situation)

 

 

Expenses

 

Cost of Goods Sold

**Materials

**Labor

**Outside Services / Subcontractors

**Shop Supplies

**Small Tools

 

General Expenses

**Advertising

**Automobile Expense

**Bank Service Charges

**Computer Expenses

**Contributions

**Depreciation

**Dues & Subscriptions

**Federal Unemployment Taxes

**FICA Expense (employer’s portion of social security tax)

**Insurance (you could set up sub-accounts for auto, business, health, life, etc.)

**Interest Expense

**Licenses & Permits

**Meals & Entertainment

**Office Expenses

**Postage

**Professional Services (accountant, attorney, consultants)

**Repairs & Maintenance

**Rent

**Salaries – Office

**Salaries – Officers or Owners

**State Unemployment Taxes

**Telephone

**Travel

**Utilities

**Workers Compensation (if your state has this fund)

 

 

This sample chart of accounts is a starting point of some of the most common general ledger accounts that I’ve seen used in various small business accounting systems.

Feel free to add or subtract accounts depending on your type of business activity.