How to Save for an Emergency Fund

 

 

Want to save for an emergency fund? Learn how to save for an emergency fund with this quickstart guide. Here you will see how to determine how much you need, where to put your emergency fund, and a quick way to track your progress.

What is Tax Compliance?

Tax Compliance refers to how well businesses adhere to the applicable tax regulations as well as pay due taxes and file tax returns in a given period. 

What is the Importance of Tax Compliance?

Tax Compliance is important for businesses for many reasons. Some of the key reasons are;

1. Legal Obligation

All businesses must comply with tax laws that are relevant to them and falls within their jurisdiction in order to run their operations smoothly. Failure to abide by these laws may lead to legal issues like penalties, fines and in some cases imprisonment.

2. Maintain the Company Reputation

If a company isn’t abiding by the tax rules and regulations then there is a chance that they could face legal proceedings, tarnishing business reputation. And once there is a dent in your business reputation, your vendors, investors and customers start losing trust in your business.

3. Continuity of Business Operations

Not abiding by the tax laws and regulations that are relevant to the business causes noncompliance, leading to legal issues. Legal issues could be tax authorities seizing business assets, block company accounts etc, disrupting business operations. And everyone is aware how costly fighting tax obligations can get, so it’s best to avoid it altogether and run operations smoothly.

4. Corporate Social Responsibility

Contributing to societal betterment is the responsibility of all companies alike. Complying with tax regulations voluntarily showcases a company’s commitment to its corporate social responsibilities as these revenues are used to fund developmental programs.

5. Expansion of Business

An established practice of voluntary tax compliance may help a company build a reliable tax forecasting mechanism and minimize being overly concerned about tax implications. Ultimately, it facilitates business growth and smooth expansion into new territories.

What are the Objectives of Tax Compliance?

Some of the main objectives of tax compliance are;

• Keep an eye on tax laws and figure out the effects of changes in rules and regulations relevant to your business
• Implementation of company-wide practice of following tax compliance procedures
• Document and keep records of all transactions made in your business for tax estimation purposes
• File tax returns and pay taxes within the given time period to avoid legal problems
• Conduct internal audits and improvise on tax compliance practices

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What Is a Liability?

A liability is something that a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. They're recorded on the right side of the balance sheet and include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.Liabilities are the opposite of assets. They refer to things that you owe or have borrowed. Assets are things that you own or are owed.

A liability is generally an obligation between one party and another that's not yet completed or paid. A financial liability is also an obligation in the world of accounting but it's defined more by previous business transactions, events, sales, exchange of assets or services, or anything that would provide economic benefit at a later date. Liabilities are categorized as current or non-current depending on their temporality. They can include a future service owed to others such as short- or long-term borrowing from banks, individuals, or other entities or a previous transaction that's created an unsettled obligation.

Current liabilities are usually considered short-term. They're expected to be concluded within 12 months or less. Non-current liabilities are long-term. They're expected to last 12 months or longer. The most common liabilities are usually the largest such as accounts payable and bonds payable. Most companies will have these two-line items on their balance sheets because they're part of ongoing current and long-term operations.

Liabilities are a vital aspect of a company because they're used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. A wine supplier typically doesn't demand payment when it sells a case of wine to a restaurant and delivers the goods. It invoices the restaurant for the purchase to streamline the drop-off and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. The wine supplier considers the money it is owed to be an asset.

Other Definitions of Liability;

Liability generally refers to the state of being responsible for something. The term can refer to any money or service owed to another party. Tax liability can refer to the property taxes that a homeowner owes to the municipal government or the income tax they owe to the federal government. A retailer has a sales tax liability on their books when they collect sales tax from a customer until they remit those funds to the county, city, or state. Liability can also refer to one's potential damages in a civil lawsuit. Liability may also refer to the legal liability of a business or individual. Many businesses take out liability insurance in case a customer or employee sues them for negligence. Source

Happy Easter

 

Happy Easter! Hope everyone had a safe and blessed holiday.

-Powers Bookkeeping Service, Inc. 

Phone: 916-302-9153

5 Signs You Should Outsource Your Business’s Bookkeeping

Running a business requires balancing many tasks. If you’re handling your own bookkeeping, it can quickly become overwhelming. Bookkeeping may seem straightforward at first, but as your business grows, so do the complexities. 

Here are five signs that indicate you may want to consider outsourcing your bookkeeping;

1. You’re Spending Too Much Time on Bookkeeping

If you find yourself spending hours each week working on financial records rather than focusing on your core business activities, it might be time to outsource. Business owners often wear many hats, but bookkeeping can be time-consuming and detracts from the focus needed on growth and strategy.

Studies show that small business owners spend an average of 120 hours annually on bookkeeping tasks. That’s time that could be better spent on activities that directly impact profits and growth.

2. You’re Not Sure If You’re Compliant with Tax Laws

Tax laws change frequently, and staying up to date can be challenging. If you’re not confident that your bookkeeping is compliant with current regulations, you risk making costly mistakes. This can result in penalties, fines, or worse, an audit. By outsourcing to professionals, you’ll benefit from their knowledge of tax law and accounting standards. They’ll help you avoid errors that could cost you down the line, providing peace of mind during tax season.

3. You’re Experiencing Rapid Business Growth

As your business grows, so does the complexity of your financial records. New employees, more transactions, and expanding operations all increase your bookkeeping workload. If you’re struggling to keep up or find that your accounting methods aren’t scaling with your business, outsourcing can help manage the increase in demand. According to a survey, 40% of businesses that experienced rapid growth said they needed professional help to handle their bookkeeping. Outsourcing allows you to focus on driving that growth while professionals handle the numbers.

4. You’re Facing Consistent Cash Flow Issues

Managing cash flow can be one of the toughest challenges for any business. Poor bookkeeping practices may lead to missed payments, unaccounted-for expenses, or unbalanced accounts. If you’re consistently dealing with cash flow issues, poor bookkeeping could be the root cause. Outsourcing your bookkeeping helps prevent mistakes like missed payments, enabling better management of your cash flow. Professionals can also generate reports that give you clearer insights into your financial situation, helping you make better decisions.

5. You Don’t Have the Expertise to Handle Complex Financial Tasks

Bookkeeping isn’t just about tracking income and expenses—it involves managing payroll, handling tax filings, and even preparing for audits. If these tasks are becoming more than you can handle, it might be time to bring in the experts. Professional bookkeepers are trained to handle complex financial tasks with accuracy. They can assist in areas such as budgeting, forecasting, and financial analysis—services that you may not have the expertise or time to manage. Source

3 Reasons Why You Should Start Tracking Your Expenses

In reality, tracking your expenses can be a game-changer for your financial health. While you may think you have a good grasp on where your money is spent, you’ll never know where your biggest costs are if you don’t keep a record of your expenses. After just a month of tracking expenses, you might be surprised about just how much you’ve spent in certain areas. Here’s why you should be tracking your expenses:

1) Tracking your expenses will help you meet your goals.

Have you dreamed of a big vacation for years but have never been able to afford it? Do you want to start saving for your child’s college fund but don’t have the extra income to do so? Thinking of making a big purchase like a new car or home? You can’t save for these goals if you don’t have a solid understanding of your spending. Many people are shocked by how much their spending in some areas adds up, from eating out to coffee runs (one $2 coffee every working day of the year adds up to about $500!). Whatever your guilty pleasure may be, you might be surprised by how your spending could be keeping you from reaching your bigger, more important goals.

2) Tracking your expenses will raise awareness about questionable charges sooner.

Identity theft. Credit card fraud. These are things that happen to other people, but never you, right? The truth is, everyone is at risk of financial theft. One key to recovering quickly from theft or fraud is catching the problem quickly. Your bank might notify you of suspicious charges, but oftentimes, you are the best first line of defense. If you aren’t watching your expenses closely, you probably won’t catch issues as soon, leaving your money at risk. Tracking your expenses helps you monitor your money and notice abnormalities early so you can protect yourself, especially in the event that you lose your wallet. When you know you didn’t spend money on something, it’s much easier to dispute fraudulent charges.

3) Tracking your expenses reveals your spending habits.

Everyone has at least one spending weakness – one store or item that’s hard to resist. Whether you can’t walk into Target without breaking the bank or you buy lunch out every day, these spending habits can really blow a budget. Tracking your expenses opens your eyes to your spending habits. How much is that Target splurge or quick lunch out on workdays really costing you? Know your habits so you can address any problem areas and improve your financial health.

Tracking your spending doesn’t have to be difficult. Keep your receipts and jot down a list of your purchases at the end of each week or month. Categorize each purchase and see what areas you are costing you the most, and look for ways to cut back or reallocate. There are many apps for your phone that can also help you track your spending as well, such as Mint. Source

What Is a Bank Reconciliation Statement

A bank reconciliation statement is a document used to determine the accuracy of financial accounts and accounting records. Bank reconciliation statements are used by companies, auditors, and accountants to detect errors or omissions between accounting records and bank account balances. They ensure that internal records are accurate and help identify and prevent fraud and losses. A bank reconciliation statement allows companies and auditors to verify the accuracy of financial records and compare these records with bank account balances.

Here are some specific reasons why you might prepare and use a bank reconciliation statement:

• Identify and prevent errors: Cross-referencing your bank account(s) and financial records can help you verify the accuracy of any checks, deposits, transfers, and other transactions you've authorized and whether they've cleared.
• Fraud detection: Reconciling your accounts can help you identify and report any fraudulent activity, including unauthorized transactions.
• Cash control: You can use your statement to help reconcile your cash accounts and ensure that any cash activity is valid and accurate.
• Tracking expenses: Your statement can help identify how much you pay in monthly bank fees, interest, and other expenses. This helps at tax time and to determine if there are any opportunities for improvement.
• Confirming accounts receivable (AR): A bank reconciliation statement can identify or confirm any outstanding customer debts, allowing you to take action to collect on these accounts.
• Improving balance sheet accuracy: Using a bank reconciliation statement ensures that the amounts recorded on the balance sheet correspond to transactions in your financial account.

How Often Should You Reconcile Your Bank Account?

How often you reconcile your bank accounts depends entirely on your needs. Individuals and businesses with simple accounting needs should consider reconciling their accounts monthly after receiving a bank statement. Businesses with a higher volume of transactions should consider increasing the frequency of reconciliation—either daily or weekly. Increasing the frequency makes cash flow management easier, helps you catch any discrepancies, and gives you enough time to correct errors before any complications arise in your accounting.

A bank reconciliation statement can help if a company's accounting records show different transactions than its bank statements. Reconciling the bank statement and internal records can identify and correct errors and uncleared transactions. When using a bank reconciliation statement, keep detailed records and notes so you can cross-check your adjustments with those made on future bank statements. Source

How to Handle an IRS Audit

 

How to address an IRS audit;

1. Understand the scope of the tax audit.

Mail audits are limited to a few items on the audit letter you received from the IRS.

Office and field audits require more work. You’ll need to gather the information/documents that the IRS is requesting, and prepare to answer in-depth questions about your finances and activities. When it comes to office and field audits, unless you are adept at IRS procedures, it’s highly recommended that you get a licensed tax professional (enrolled agent, CPA, or attorney) to represent you and advocate your tax return positions before the IRS.

2. Prepare your responses to IRS questions.

For a mail audit, prepare a complete response to the items the IRS is questioning in the letter/document you received.

For office and field audits, prepare for the meeting with the IRS officer/agent. Gather all information the IRS has requested and prepare to present it to the IRS. Prepare for possible questions from the IRS, such as those concerning unexplained bank deposits or additional income. The IRS agent will also ask about your job, family, and any outside businesses. Basically, you’ll need to be prepared to give an account of your entire year’s activities.

If you don’t have documents to prove any items on your return, you may have to reconstruct it from third parties or other records. If a third party can attest to an undocumented item, you can use techniques such as an affidavit.

3. Respond to IRS requests for information/documents on time, and advocate your tax return positions.

If the IRS thinks there is an adjustment to your return, the IRS will start asking more questions. You’ll get an Information Document Request, which you’ll need to fully respond to by the deadline. The IRS may disagree with you, stating, for instance, that you took a deduction that wasn’t allowed or that you should have reported more income on your return. If you disagree, present your interpretation of the facts and tax law to the IRS.

Ultimately, the IRS will close the tax audit, either proposing no changes or proposing adjustments to your return. You’ll get a report of the IRS findings and a letter that allows you 30 days to appeal if you disagree (called the 30-day letter).

4. If you disagree with the results, appeal to the appropriate venue.

Within 30 days, you can request an appeal with the IRS Office of Appeals. After 30 days, the IRS will send you a letter, called a Statutory Notice of Deficiency. This letter closes the tax audit and allows you to petition the U.S. Tax Court. In mail audits, remember that the letter proposing adjustments also serves as a 30-day letter. Taxpayers commonly overlook this letter and lose their ability to appeal the audit findings within the IRS.

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4 Common Accounting Errors and How to Prevent Them

Mistakes happen — even in buttoned-up accounting departments. Despite everyone's best efforts, errors can (and do) make their way into accounting processes and cause all sorts of havoc. A transposed digit can throw debits and credits noticeably out of balance, or a reversed entry can cause an imperceptible error to casual readers. That's why it's important to have a plan in place to detect, minimize and fix mistakes. Error prevention may be a loftier, even impractical, objective given the human element involved, though the right accounting software controls can help.

Accounting errors are unintended accidents; they are the result of an inadvertent mistake. Sometimes accounting errors are caused by a slip of the hand, like transposing a number or hitting an incorrect key. Other times they stem from a misunderstanding of accounting rules or company policy. Nevertheless, any accounting department worth its salt aims to limit errors in its accounting data, especially data that flows into financial reporting used by internal and external stakeholders. Errors can be embarrassing at best, misleading at worst.

Accounting errors that are evident on a trial balance are easy to identify and fix as part of the accounting close. But for the majority of accounting errors — those that are undetectable at the trial balance level — more effort is required. For this reason, it's important to put processes in place to detect these four common accounting errors:

1.) Data entry errors. These are basic accounting mistakes. Data entry errors include transposed numbers, typos and other (often manual) slipups, like a misplaced decimal.

2.) Errors of commission. This category of errors arises from an incorrect action — for example, a transaction is recorded but some part of it is wrong, such as using an incorrect general ledger account number or using a miscalculated or improperly rounded value. Reversed entries, where debits and credits are improperly switched, and duplicated entries are also errors of commission.

3.) Errors of omission. These errors happen when a transaction is overlooked and not recorded. It's simply left out of the accounting records.

4.) Errors of principle. Errors of principle occur when the wrong accounting treatment is applied to a transaction. Errors of principle are significant technical accounting errors, as the resultant transaction will not be in accordance with Generally Accepted Accounting Principles (GAAP), either because the wrong guidance was followed or because it was followed incorrectly.

It's especially tricky to find accounting errors that compensate for each other. Sometimes these errors manage to unintentionally offset each other, masking the underlying mistake. For example, lease expenses for two identical company cars can be duplicated in one department and omitted in another, making totals appear accurate even though individual departmental costs (and associated key performance indicators) are incorrect.

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Accounts Payable vs Accounts Receivable

Accounts receivable and accounts payable are the yin and yang of business: When revenues and expenditures stay in healthy equilibrium, the company can seize growth opportunities, and relationships with customers and suppliers remain on a positive footing.

A company's accounts payable (AP) ledger lists its short-term liabilities —obligations for items purchased from suppliers, for example, and money owed to creditors. Accounts receivable (AR) are funds the company expects to receive from customers and partners. AR is listed as a current asset on the balance sheet. Lenders and potential investors look at AP and AR to gauge a company's financial health. Income is important, and so is prudent spending to grow the business and retain customers. Mismanagement of either side of the equation can adversely affect your credit and, eventually, the stability of your business.

What Is Accounts Payable (AP)?

A company's accounts payables comprise amounts it owes to suppliers and other creditors — items or services purchased and invoiced for. AP does not include, for example, payroll or long-term debt like a mortgage—though it does include payments to long-term debt.

Accounts payable are typically recorded upon receipt of an invoice based on the payment terms both parties agreed to when initiating the transaction. When a finance team receives a valid bill for goods and services, it is recorded as a journal entry and posted to the general ledger as an expense. The balance sheet shows the total amount of accounts payable, but it does not list individual transactions. Once an authorized approver signs off on the expense and payment is issued per the terms of the contract, such as net-30 or net-60 days, the accounting team records the expense as paid.

AP departments are responsible for processing expense reports and invoices and for ensuring payments are made. A skilled AP team keeps supplier relationships positive by making sure vendor information is accurate and up-to-date and bills are paid on time. The team can save the company money by taking full advantage of favorable payment terms and available discounts. A strong AP practice contributes to business success by ensuring cash forecasts stay accurate, minimizing mistakes and fraud and generating reports for business leaders and third parties.

What Is Accounts Receivable (AR)?

Accounts receivable are the funds that customers owe your company for products or services that have been invoiced. The total value of all accounts receivable is listed on the balance sheet as current assets and include invoices that clients owe for items or work performed for them on credit.

Generally, vendors bill their customers after providing services or products according to terms mutually agreed on when a contract is signed or a purchase order is issued. Terms typically range from net 30 — that is, customers agree to pay invoices within 30 days — to net 60 or even net 90, which a company may choose to accept to secure a contract. However, for large orders, a company may ask for a deposit up front, especially if the product is made to order. Services firms also frequently bill some portion of their fees up front.

Once a company delivers goods or services to the client, the AR team invoices the customer and records the invoiced amount as an account receivable, noting the terms. If the client pays as agreed, the team  records the payment as a deposit; at that point, the account is no longer receivable. If the customer fails to pay on time, the AR or collections team will likely send a dunning letter, which may include a copy of the original invoice and list any late fees.

With accounting and finance software, companies can improve their days payables metrics by automatically emailing customers about past-due invoices and requesting immediate payment. Business leaders can drill down into each account, or all past-due accounts, for more detailed reporting on customer, invoice, due date, amount due and credit terms. Look for the ability to exclude certain customers, such as those with extended terms, from collection emails.

AP and AR are important because both are fundamental to a company’s financial health—they directly affect cash flow and, when tracked accurately, enable solid fiscal decision-making. Companies may be able to save money via payment discounts or increase customer loyalty by offering these opportunities.

AP, which represents money a company owes to suppliers or creditors, is essential for:

• Managing short-term cash flow by, for example, deciding which payments to delay or make first to access discounts.
• Upholding positive relationships with vendors through on-time payments, potentially leading to better terms.
• Financial reporting, which is a core component of current liabilities and therefore affects a company’s overall financial health.

On the flip side, AR, which represents money owed to a company by its customers, is essential for:

• Financial decision-making and reporting via allowing companies to record and track sales before receiving an actual payment, thus providing a more complete picture of the company’s financial performance.
• Optimizing cash flow management, which is important for effective budgeting and financial planning, by helping predict future cash inflows.
• Enhancing liquidity assessments, as AR is a key component of current assets and directly impacts a company’s working capital position.

Together, AR and AP are indispensable for creating accurate financial statements that truly reflect a company’s financial position. Analyzing AP and AR trends can shed light on operational efficiency, customer payment behaviors, and vendor relationships. And managing the two processes directly impacts a company’s liquidity, solvency, and overall financial health.

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