Here are some of the questions we hear at Cary Accounting Professionals about small business accounting and Cary individual income tax FAQs.
Answer: What you cannot do is compute your tax out according to the tax code, and then send the government a check for more than what you owe. If you do that, they’ll send you a check with a refund of the overpayment, unless you specifically said that you want the overpayment used as a prepayment of the next year’s tax, in which case they’ll simply credit it to your account.
What you can do, however, is make specific voluntary elections that result in paying more tax than if you had made a different election. For example, you may elect to itemize deductions even when the standard deduction would be greater. You may elect to file as married filing separately even though filing a joint return would result in paying less tax. Most nonrefundable credits are wholly optional, and you are not required to take them if you do not want to. Even the election whether to round amounts to the nearest dollar (which you are allowed, but not required, to do) can affect your tax bill. I know people who figure their taxes both ways (with and without rounding) and submit only the return that results in the lowest tax.
Answer: Depreciation is the accounting process of allocating the cost of tangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. That last part of the sentence “in those periods expected to benefit from the use of the asset” is called the matching principle: expenses should be recorded during the period in which they are incurred.
Depreciation is often referred to as a non-cash expense. The cash was spent when we bought the asset, depreciation allocates the value of the asset over the years in which we use it.
In order to determine the depreciation charge per year, it is important to assess upfront how many years you realistically think you can use the asset. You then align the numbers of years that you depreciate to the number of years of the assets’ useful life. We bought a truck for our company for $100,000, with a useful life of 5 years, so $20,000 depreciation per year. We also bought a machine for $100,000, with a useful life of 10 years, so $10,000 depreciation per year. Finally, we bought an office building for $100,000, with a useful life of 20 years, so $5,000 depreciation per year.
Answer: Having an understanding of how money works and the basic elements involved will be a valuable skill for you no matter what job or career you have in the future. Finance is a fundamental building block of our civilisation since earliest times. At present a large proportion of the population is not financially literate, so if you have the chance to learn bookkeeping, and you find you enjoy it, you've got the basis of a skill that will take you into many places.
A good bookkeeper at the centre of a small company can have a fascinating job, interacting with all kinds of people every day. On the other hand, you could wind up in the job which essentially was just processing one type of invoice all day long.
My financial training and knowledge have taken me all over the world, and there is not a job anywhere that doesn't involve numbers in some way or another.
Answer: Your 'books will be in a mess' from an accountant's point of view if:
• there is no clear separation in the transactions between the business and the business owner - where you have used personal funds for business expenses or business assets for personal use. For the accountant, each entity (you and your business) must be reported on separately and if the transactions are mixed then your 'books will be in a mess'
• there are missing source documents for the transactions that are clearly evident on the bank statement. If the accountant is unable to clearly distinguish the sales receipts from loan/capital receipts or distinguish the payments for equipment from the payments for stock, then your 'books will be in a mess' because accurately determining your profit and tax liability is near impossible.
• in trying to save money you classified the financial transactions according to your own rudimentary understanding of bookkeeping and actually got it completely wrong. If the accountant realizes that they cannot trust the basic classification of the transactions, then they will say your 'books are in a mess' because they will need to re-check each transaction line-by-line to make sure they are classified correctly.
• the books/records that you present to the accountant can't be reconciled. i.e. the bank statement doesn't reconcile with the cash at bank account, your physical stocktake does not reconcile with your Inventory account, the money owed to you from your customer's list does not reconcile with the accounts receivable account, the list of money you owe to suppliers does not reconcile with the accounts payable account or your list of physical assets does not reconcile with your asset register. If these cross-checks do not reconcile and there is no easy way to make them reconcile, then your 'books will be in a mess
Cashflow is the difference between the cash a business receives and cash a business pays out. If the difference between the cash in and cash out is positive, then the business is said to have a positive cash flow and a negative cash flow if the reverse is true.
So a business can increase its cash flow if it increases the cash it receives and decreases the cash it pays out in a particular period. Cash flow is critical to business success with some believing that “cashflow is more important than your mother”. This is because over 60% of business fail because of poor cashflow management and not because the idea was no good.
So looking at each side of the equation in turn, we can discover the strategies to:
Increase cash received, which includes:
• Practice better accounts receivable management - be more diligent in following up money owed to the business by customers in the accounts receivables.
• Encourage early payment of customer accounts - offer discounts to customers who pay their bills within say 7 days (5% discount should see them doing so)
Q: What does it take to be a good accountant?
In my humble opinion, a good accountant has four (4) attributes:
1. Technically proficient in their field of expertise (such fields include: Audit, Taxation, Financial Reporting, Management Accounting and Insolvency, to name a few). This goes hand in hand with ensuring you obtain the proper qualifications to be recognised in your field of expertise (I.e. CPA, Chartered Accountant and/or MBA, if required);
2. Understands principles of commerciality, meaning that, although you may be technically correct under law, you consider a commercial compromise to resolve disputes quickly without the need for heavily investing time and or money in legal battles;
3. Has highly developed people skills and an ability to deal with people from all walks of life. This is another way of saying, 'has a personality'; and
4. Build big networks of people or referrers.
Gone are the days that you can be successful just being technically proficient at what you do. This is based on the age old principle that, people do business with people they like.
These are just a small sampling of small business accounting FAQs and individual income tax. You surely have other questions. Call our expert personal tax accountants and small business accounting, consulting and Quickbook accountants.