ACCOUNTING BASICS: Debits and Credits Explained

The terms ‘Debit and Credit’ are the bread and butter of Double Entry Bookkeeping and reflect the duality or double-sided nature of all financial transactions. It’s crucial to understand this concept when studying Accounting for Beginners because all transactions generate Credit and Debit entries.  At the end of the video, I'll show you the secret to Debits and Credits which will make remembering which side of the Accounting Equation they fall on a piece of cake!

What Is A Recurring Transaction?

When a customer pays an amount at regular intervals for a subscription or membership fee, this is known as a recurring transaction. For instance, spending $10 per month to access premium content on your website is a recurring transaction. 

E-commerce and mobile commerce businesses are increasingly using recurring transactions, as both transactions are in demand today due to advancements in technology. They simplify your business routine and help you save time, or they can help you increase your sales volume and generate more revenue. 

Moreover, these options are more diverse than any other ones - from debit and credit cards (VISA, MasterCard, American Express) to online wallets, online banking, to mobile phone accounts - customers have more than one way to pay for goods or services.

Why Do You Need Recurring Transactions?

Businesses may receive payments from clients more efficiently with recurring transactions. In this case, you don't have to worry about customers forgetting to pay or running out of money in your bank accounts. Instead, You can process the payment using Stripe's API for credit cards or Stripe Connect for ACH payments.

How Do Recurring Transactions Work?

You will pay your bills on time if you set up recurring transactions. There is also a convenient method to set up automatic payments for services like gym memberships, magazine subscriptions, and even Netflix subscriptions.

When you set up a recurring transaction, that amount is automatically deducted from your bank account every month or week. You'll never have to worry about forgetting a payment because the setup is as simple as clicking the mouse and defining the dates.

Here's how you can set up recurring transactions;

• Use your bank's website or mobile app to set up recurring transactions
• Then, specify how frequently you want to take money from your account, and determine the withdrawal  transaction amount
• Various banks provide different withdrawal frequencies; some allow daily, weekly, or monthly withdrawals, while others only allow monthly or quarterly withdrawals.

You can decide when it will start (typically between one and three months) and whether it will last permanently or for a set amount of time. First, however, you should take advantage of online bookkeeping software that gives you complete control over your recurring transactions and their cash outflow. Many people aren't familiar with getting paid on the same basis repeatedly. Nothing can do it better than recurring transactions. You will find a lot of online periodic transaction apps, but bookkeeping software offers more reliable and authentic transactional features. It can help you start your business even if you are a sole proprietor promoting your business. 

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What are Payroll Deductions?

Payroll deductions are wages withheld from an employee’s total earnings for the purpose of paying taxes, garnishments and benefits, like health insurance. These withholdings constitute the difference between gross pay and net pay and may include:

• Income tax
• Social security tax
• 401(k) contributions
• Wage garnishments
• Child support payments

Some payroll deductions are voluntary and may be taken out of a paycheck on a pretax or post-tax basis as long as the employee provided written authorization. Taxes and wage garnishments, on the other hand, are mandatory and employers who fail to accurately withhold these deductions may be liable for the missing amounts. Payroll deductions are generally processed each pay period based on the applicable tax laws and withholding information supplied by your employees or a court order. The calculations can be done manually or you can automate the process using a payroll service provider. Many businesses choose automation because it reduces errors and ensures that payments are filed with the proper authorities on time.

The amount you withhold for each employee depends upon the individual’s Form W-4 Employee’s Withholding Certificate, state and local withholding certificates, benefit selections and other details. For instance, has the employee enrolled in your health insurance plan or is there a court-ordered garnishment to comply with? Your place(s) of business and where your employees perform services also play a factor in payroll deductions because not every state collects income tax.

Pretax deductions

Pretax deductions are taken from an employee’s paycheck before any taxes are withheld. Because they are excluded from gross pay for taxation purposes, pretax deductions reduce taxable income and the amount of money owed to the government. They also lower your Federal Unemployment Tax (FUTA) and state unemployment insurance dues. Types of pretax deductions include, but are not limited to, health insurance, group-term life insurance and retirement plans. And while employees are not required to participate, it’s often in their best interest to do so. Pretax contributions can save them considerable money compared to what they would pay for benefits and other services post-tax.

The savings, however, are not limitless. There are usually caps on how much employees can contribute on a pretax basis. The IRS, for instance, regulates the total amount that can be deferred pretax to a 401(k)-retirement plan each year.

Statutory deductions

Statutory deductions are mandated by government agencies to pay for public programs and services. They consist of federal income tax, Federal Insurance Contributions Act (FICA) tax (Medicare and Social Security) and state income tax. To file them correctly, you need to know the work status of your employees.

If you hire independent contractors, you usually don’t have to withhold income tax, Social Security tax or Medicare tax from their wages. That’s because these types of workers pay self-employment tax on their income. On the other hand, if someone is a bona fide employee, you’re required to deduct the necessary taxes. You can submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to the IRS for further assistance.

FICA taxes

FICA taxes support Social Security and Medicare. Employees pay Social Security tax at a rate of 6.2% with a wage-based contribution limit and they pay Medicare tax at 1.45% without any cap. This equals 7.65% in FICA taxes per paycheck (until the Social Security wage base is reached), which you are legally obligated to match.

Some employees may also be subject to Additional Medicare tax. Starting with the pay period in which an individual’s earnings exceed $200,000, you must begin deducting 0.9% from his or her wages until the end of the year. Additional Medical Tax also applies to certain levels of railroad retirement compensation and self-employment income. You’re not required to match this deduction.

Federal income tax

The federal government has seven income tax brackets, ranging from the 10% marginal rate to 37%. These rates are applied progressively, which means that an employee’s wages are first charged at the lowest rate until they reach that bracket’s threshold. They continue to be charged at each subsequent rate until they reach their total gross income or the highest tax bracket.

The taxable income in each bracket varies depending on the individual’s filing status – single or married filing separately, married filing jointly, or head of household – which is noted on Form W-4. Yearly adjustments for inflation by the IRS will also determine the tax bracket thresholds. To withhold federal income tax each pay period, you generally have two options – the wage bracket method or the percentage method – both of which can be found in IRS Publication 15-T.

State and local taxes

State income tax laws vary widely, ranging from simple to complex. Some charge a fixed rate against all income, others have multiple tax brackets and a few charge no income tax at all. Still others follow the federal tax code instead of creating their own. For these reasons, you should consult with all the state governments you operate in to make sure your payroll complies with local regulations.

How to calculate payroll deductions

Calculating payroll deductions is the process of converting gross pay to net pay. To do this:

1. Adjust gross pay by withholding pre-tax contributions to health insurance, 401(k) retirement plans and other voluntary benefits.
2. Refer to the employee’s Form W-4 and the IRS tax tables for that year to calculate and deduct federal income tax.
3. Withhold 7.65% of adjusted gross pay for Medicare tax and Social Security tax, up to the wage limit.
4. Deduct 0.9% for Additional Medicare tax if year-to-date income has reached $200,000 or more.
5. In states that charge income tax, withhold it according to the instructions found in each state’s employer’s tax guide or tax code.
6. Subtract garnishments, contributions to Roth IRA retirement plans and other post-tax dues to achieve the total net pay. 

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1099s Are Coming

Now is the time to get the information from your vendors and payees if you need to issue them 1099s in January. 

Here is a link to a W9 to get the information you need.

What Is An Important Difference Between Bookkeepers And Accountants?

Role and Responsibilities of Bookkeepers

Bookkeepers play a crucial role in the day-to-day financial operations of a business. They are responsible for recording all financial transactions accurately and maintaining organized financial records. Their duties often include managing accounts receivable and payable, ensuring timely invoicing, reconciling bank statements, and maintaining a general ledger. Bookkeepers are the backbone of financial record-keeping, ensuring that all transactions are recorded in the correct accounts. This job requires attention to detail and a solid understanding of basic accounting principles.

Role and Responsibilities of Accountants

Accountants, on the other hand, take on a more analytical role. While they oversee the work of bookkeepers and ensure accuracy, their primary focus is on interpreting, classifying, analyzing, and summarizing financial data. Accountants prepare financial statements, conduct audits, and offer reports that help future financial planning. Their duties also extend to tax preparation, financial forecasting, and advising management on financial decisions. They provide a higher level of financial oversight, offering insights that help guide strategic business decisions.

Educational Requirements for Bookkeepers

Educational requirements for bookkeepers are generally less stringent than for accountants. Many bookkeepers hold an associate degree in accounting or a related field, although some may enter the profession with a high school diploma and receive on-the-job training. Proficiency in accounting software, strong organizational skills, and a keen eye for detail are essential qualities. Some bookkeepers may also choose to obtain certification through organizations like the American Institute of Professional Bookkeepers (AIPB), which can enhance their job prospects.

Educational Requirements for Accountants

In contrast, accountants typically require advanced education. Most accountants hold at least a bachelor’s degree in accounting or finance. Many go on to earn advanced degrees, such as a master’s in accounting or an MBA with a concentration in accounting. In addition, accountants often pursue professional certifications such as Certified Public Accountant (CPA), Chartered Accountant (CA), or Certified Management Accountant (CMA), which require passing comprehensive exams and satisfying continuing education requirements. These credentials demonstrate a higher level of expertise and are highly valued in the industry.

Professional Certification and Licenses

Both bookkeepers and accountants can benefit from obtaining professional certifications. For bookkeepers, certifications like Certified Bookkeeper (CB) from AIPB signify a recognized standard of knowledge and expertise in bookkeeping. For accountants, obtaining a CPA or another professional designation not only enhances credibility but also opens doors to higher-level positions and specialized fields within accounting.

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Don't Wait Until Year End

Let us get your books in order now and not rush at the end of the year!

We can help organize your books and keep them that way moving forward. 

Give us a call or contact us for a consultation.

Powers Bookkeeping Service, Inc. 

916) 302-9153

info@powersbookkeepingservice.com

2026 Retirement Rule

What Is the 2026 Retirement Rule?

Starting in 2026, a key retirement savings rule changes how catch-up contributions must be handled for higher-earning individuals aged 50 and older.

Who’s Affected?

If in 2025 you earned more than $145,000 in FICA wages (as reported in Box 3 of your W-2), then:

Any catch-up contributions you make in 2026 to your employer-sponsored plan, such as a 401(k), 403(b), or 457(b)—must be made on an after-tax Roth basis, not pre-tax traditional. SVA Certified Public AccountantsMunshi Premchand MavavidyalayaAldrich WealthOwn Your FutureEmployee Fiduciary

This is a significant shift, especially for high earners who previously benefited from immediate tax deductions by contributing pre-tax.

KEY DETAILS

Compensation Threshold

• The threshold is based on FICA wages, not the traditional Highly Compensated Employee (HCE) threshold.
• This means some employees might still be eligible for pre-tax contributions even if they earn more overall—if their FICA wages remain below the limit Aldrich WealthEmployee Fiduciary.

2025 Catch-Up Limits

• Standard catch-up limit: $7,500.
• Those aged 60–63 in 2025 get a higher “super catch-up” limit—$11,250 (150% of the standard) The Tax AdviserMcLane MiddletonForvis MazarsEmployee Fiduciary.
• Importantly, in 2026, all eligible catch-up contributions—whether standard or super—must be made via Roth if you exceed the wage threshold Forvis MazarsMunshi Premchand MavavidyalayaAldrich WealthEmployee Fiduciary.

What If Your Plan Lacks Roth Options?

If your employer-sponsored plan does not offer a Roth contribution option:

• Those above the threshold cannot make catch-up contributions at all in 2026. Aldrich WealthOwn Your FutureEmployee Fiduciary
• That makes it critical for plan sponsors to add Roth capabilities before January 1, 2026, if they want high earners in their workforce to continue saving via catch-up contributions Forvis MazarsMunshi Premchand Mavavidyalaya.

Planning Tips

• Check your 2025 W-2 (Box 3) to see if your FICA wages exceed $145,000.
• If so, plan for Roth-only catch-up contributions in 2026.
• Those under the threshold still have flexibility: choose pre-tax or Roth if your plan allows.
• Employers should update plan features now to include Roth catch-up options to maintain full participation.

Catch-Up Rule Summary

• 2025 - Standard limits ($7,500; $11,250 for ages 60–63) with pre-tax or Roth options
• 2026 - If FICA wages > $145K → Roth-only catch-up contributions required
• If plan lacks Roth option - Affected employees lose catch-up ability entirely.

What is a Notary Public?

A Notary Public is an official appointed by a state government to serve the public as an impartial witness during notarizations. As ministerial officials, they are expected to follow statutory rules without the exercise of significant personal discretion. Notaries Public certify the proper execution of many of the life-changing documents of private citizens — whether those transactions convey real estate, grant powers of attorney, establish a prenuptial agreement, or perform the multitude of other activities that enable our civil society to function.

Notary Public Responsibilities

Notaries perform notarizations, or notarial acts, to deter fraud and establish that the signer understands the document they're signing and that they're a willing participant in the transaction.

There are two primary responsibilities of Notaries: 1) Validate the signer’s identity and 2) Confirm the signer’s willingness and awareness to sign the document or complete the transaction.

Identifying the Signer

Generally, a Notary will ask for a current form of identification that has a photo, physical description and signature. Acceptable IDs usually include a driver's license or passport.

Confirming Willingness and Awareness

Notaries will confirm both the signer's willingness to sign the document and their awareness of its implications. On occasion, Notaries encounter individuals who are being forced to sign a document or whose health condition impairs their decision-making abilities. This is why Notaries are essential to preserving the public trust, as they ensure the integrity of documents while protecting the rights of all parties involved.

Some notarizations require the Notary to put the signer under an oath, declaring under penalty of perjury that the information contained in a document is true and correct.

Different Types of Notary Jobs

Every Notary begins with a traditional commission, but they can branch out to provide specialized services. Below are the different types of Notary jobs you may want to consider:

• Traditional Notary: Notary who qualifies for a commission in their state and has met the state’s application requirements.
• Mobile Notary: Traditional Notary who travels to the signer’s preferred location, such as the signer’s home or hospital.
• Remote Online Notary (RON): Notary with a traditional commission who has met their state’s requirements to become authorized to perform remote notarizations.
• Notary Signing Agent (NSA): Notary with a traditional commission who has also passed a background screening to comply with industry standards and handle loan signings.

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How to Make a Budget: 5 Steps to Create a Personal Money Plan

Want to save more, pay off debt, and finally stop stressing about money? Budgeting is how you make it happen! Because when you tell your money where to go—instead of wondering where it went—you’re the one in control. Even millionaires do it! And guess what? Budgeting doesn’t have to be overwhelming. I’ll walk you through how to make a budget step by step. Trust me, once you start, you’ll wonder why you didn’t do it sooner!

Here’s how to make a budget in five steps:

Step 1: List your income.

The first step to building your budget is to list your income. Income is any money you plan to get during the month—that means your normal paychecks and any extra money you earn through a side hustle, garage sale, freelance work or anything like that.

You work weekends as a barista or babysitter? That’s income, and it goes in your budget.

You can create separate income budget lines for every paycheck you (and your spouse) get, plus anything extra coming in. (Note: You’re working with net income here, meaning what you bring in after taxes or anything else that’s taken out of your paycheck.)

Here’s an example of how to list your income in your budget:

His Paycheck 1: $1,500

Her Paycheck 1: $2,300

His Paycheck 2: $1,500

Her Paycheck 2: $2,300

Side Hustle: $500

Total Income: $8,100

What if I don’t make the same income every month?

If you’ve got an irregular income, take a look at what you’ve made the last few months and list the lowest amount as this month’s income budget line. You can adjust later in the month if you make more and add that extra money to your money goal or another budget line.

Step 2: List your expenses.

Now that you’ve planned for the money coming in, you can plan for the money going out. It’s time to list your monthly expenses! Know your budgeting priorities.

When planning for the month ahead, you want to make sure you budget for certain expenses before others. That said, list your expenses in this order:

• Giving. I believe in putting 10% of your income here—it’s a great way to start your budget with a spirit of generosity.
• Saving. You’ve got to pay yourself first before you pay everyone else! This could be an emergency fund or another savings goal. (Side note: If you’ve got debt, you need to pay it off before you build your savings. So use your “save” money toward your Baby Step 1 emergency fund and your debt snowball instead.)
• The Four Walls. You want to prioritize these essentials: food, utilities, shelter and transportation. Create a budget category for each of these, as well as budget lines underneath for your specific expenses.

All other monthly expenses. Start with the important stuff—like insurance, debt and childcare. Then move on to nonessentials—like personal spending, fun money and entertainment. And be sure to include a miscellaneous line for unexpected expenses!

Customize your budget categories and budget lines.

Keep in mind, everyone’s exact budget percentages are going to be different depending on their income and lifestyle. But here’s an example of what your budget expenses might look like:

Budget Category: Food

• Groceries: $600
• Eating Out: $150

Budget Category: Utilities

• Electricity: $130
• Water: $60
• Natural Gas: $40

Budget Category: Shelter/Housing

• Mortgage: $1,450
• HOA Fees: $50

Budget Category: Transportation

• Gas: $180

Think of a budget category as a folder and the budget lines as the files inside it. Feel free to create as many budget categories and budget lines as you need to make sure all your expenses are accounted for.

Your budget will most likely have both fixed and variable expenses. Fixed expenses stay the same every month, like your rent or mortgage. Variable expenses change, like groceries or gasoline. And don’t worry if that grocery budget line is way off at first. That’s where most people tend to overspend. It usually takes a couple of months to get the hang of budgeting, so just start with your best estimate based on your past spending (again, looking at your bank transaction history will help with this.)

Step 3: Subtract expenses from income.

Next, subtract all your expenses from your income. Since a zero-based budget is the goal, you want this number to be zero. Yes, zero. Now, this doesn’t mean you spend every single cent you earn. It also doesn’t mean you let your bank account reach zero (I recommend leaving a buffer in there of about $100–300).

Zero-based budgeting just means you give every dollar a job to do—whether it’s spending, giving, saving or paying off debt. It’s all accounted for and given a purpose. It’s the reason I love this method. You work hard for your money, right? Well, it should work hard for you! Every. Single. Dollar.

What if I have money left over?

If you have money left over after covering your expenses, don’t let it go un-budgeted. Without a plan, it’s easy to waste it on coffee or impulsive online purchases. Put those extra dollars to work by directing them toward your current money goal.

What if I don’t have enough to cover all my expenses?

Or what if you end up with a negative number? You just need to go back through your budget and cut expenses until you break even. Hint: Start with your eating out and entertainment budget lines. If dining out is your guilty pleasure, cutting back might sting at first. But here’s the bottom line: You can't spend more than you earn. If you’re still struggling to make ends meet after cutting expenses, don’t forget the power of increasing your income with a side hustle or selling stuff. Just remember to resist the urge to spend more when your income rises. That extra cash should go toward your planned expenses.

Step 4: Track your expenses (all month long).

Want to master budgeting? Here’s the secret: Track. Every. Expense.

A budget is just wishful thinking without this step—like planning to train for a marathon but never leaving the couch. Tracking your transactions means you know exactly where your money is going all month long. Gas? Subtract it from transportation. Rent? From housing. Morning coffee? From personal spending.

Find a tracking routine that works for you—daily, weekly or right after each purchase. Then adjust as needed. If your electricity bill is higher than expected, shift money from another category to cover the difference. If your water bill is lower, put the extra toward your financial goals.

Tracking your expenses throughout the month helps you:

• Stay accountable. Tracking your expenses keeps you accountable to your budget, yourself and your money goals. And if you’re married, tracking also keeps you accountable to your spouse. After all, you’re both in this money thing together. 
• Avoid overspending. As you enter expenses, you see how much you have left in every budget line. You’ll know exactly how much you can spend so you don’t go over.
• Stay on top of the budget. Your budget is not a set-it-and-forget-it project. When you track transactions, you’re constantly in your budget. You can make adjustments so you know where your money is going—all the time.
• Learn and adjust your spending habits. Tracking can show you the areas that tend to trip you up, and it can also help you get back on track with your goals.

Step 5: Make a new budget before the month begins.

While your budget shouldn’t change too much from month to month, the fact is, no two months are exactly the same. That’s why you need to create a new budget every single month—before the month begins.

Here are some examples of month-specific expenses to prep for:

• Celebrations (birthdays, anniversaries)
• Holidays
• Seasonal expenses (back to school, sports, lawn care)
• Semiannual expenses (insurance premiums, car maintenance, school tuition)
• Annual expenses (subscription renewals, yearly exams, pet vaccinations)

So, making a budget isn’t as bad as you thought, right? It’s pretty easy when you get the hang of it. But sticking to the budget is where most people get in trouble and give up, because budgeting isn’t something you put on autopilot. You’ve got to be intentional about it, checking in with how you’re doing as the month goes on and adjusting accordingly. And those impulse purchases and seasonal sales can be pretty enticing (trust me, I’ve been there!), but you have to actively say “no way” to all of them.

It's a lot of work, but mastering a budget is mostly about changing your attitude. See, you shouldn’t look at a budget as restricting your spending or spoiling your fun—it’s a tool that allows you to spend without worry. You can still give yourself fun money. Just put it in the budget at the beginning of the month!

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Happy Labor Day

 

We Hope You Had A Safe and Restful Weekend! - Powers Bookkeeping Service, Inc. 

(916) 302-9153

info@powersbookkeepingservice.com