Life’s full of questions. Here are some answers.
Here are some commonly asked questions we’ve collected and answered. Of course, if your question isn’t included here, we encourage you to ask us directly.
How much do individuals or businesses need to know about accounting and bookkeeping?
That depends. Some people need very little help with their personal finances. Beyond simple tax filings, their needs are minor. Still others face more complex financial decisions and consulting with an accountant may prove beneficial. Once you move beyond a basic tax filing, it may be beneficial to speak with a tax preparer or accountant.
When it comes to your company, numbers are the language of business. The more you understand this language, the better you will manage your company and the better able you’ll be to make the best decisions. At the very least, you should understand your bookkeeping system, how money gets spent and how much cash your company has coming in. You should also be able to read and understand the two basic financial statements: balance sheet and income statement.
Are financial projections important?
Financial projections are estimates of future business activities. These projections can give you a frame of reference, even if the projection isn’t highly accurate. The main value of projections isn’t to accurately predict the future, but to create a plan with goals and defined objectives.
Which financial statements are most valuable?
Your organization needs at a bare minimum two basic financial statements:
- The balance sheet – a record of assets, liabilities and capital
- The profit and loss statement – a summary of earnings and expenses
What is a balance sheet?
A balance sheet shows three things about a business: assets, liabilities, and owner equity. Assets are those things owned by the business. Liabilities are monies and goods that are owed to others. Equity represents the capital and accumulation of profits and losses of the company.
What is a profit and loss statement?
A profit and loss statement – often abbreviated as “P&L” – is an income statement that functions as the scorecard for your business. A P&L shows revenue, expenses and profit (or loss). Generally, these are reported for a defined period such as a month, a quarter or a year.
What is a cash flow statement?
The most basic form of cash flow statement shows a listing of cash coming into the business and cash going out.
Is it better to buy or to lease?
Both options have pros and cons, depending on your situation. Leasing doesn’t tie up immediate cash flow. But leasing an item or piece of property may mean that at the conclusion of the lease’s term, you’re left without a capital asset. Buying, on the other hand, can tie up capital and leave you with depreciating assets. Of course, there are tax ramifications both ways. Carefully weighing alternatives and performing a cost analysis can help you choose which is best for you.
When should I hire an accountant?
Financial advice is available from a variety of sources. Some may not need any advice. Still others may benefit from the efforts of a tax preparer. Small- to mid-size businesses may need help preparing and reporting payroll. Still others would surely benefit from the counsel and work of an accountant or accounting firm.
People should seek advice from others when they feel as though they may be facing issues or have questions they can’t answer. A good professional will offer an initial consultation, generally free of charge, on whether or not they can help.
Can I write-off a car, truck or SUV as a business expense?
Individuals who use their vehicle during the course of business can generally deduct a portion of their vehicle expenses on their tax return.
But – and it’s a big but – for a person to write of these expenses, they’ll need to substantiate business use. The Internal Revenue Service expects you to keep a log of business miles, commuting miles and miles driven for personal use. If you track this information, you can then deduct an amount equal to the business mileage allowance (which varies, year to year, but generally is about $.50 per mile).
Or you can deduct the percentage of vehicle expenses equal to the overall business mile percentage relative to total miles driven.
Your accountant or other financial advisor can advise you on how best to handle your specific business’s use.
What form should my business be? Sole proprietorship? Corporation? LLC?
Here are some general guidelines:
- A sole proprietor making profits equal to a fair salary for someone who performs a similar job may benefit from being set up as a single-member limited liability company. This can help keep accounting and taxes simple, yet provide a degree of liability protection. (Your attorney can advise you in greater detail.)
- Sole proprietors making profits that exceed a fair salary may benefit by being set up as an S corporation. Accounting and taxes will become more complicated, but may reduce overall self-employment tax liability.
- Partnerships and groups of investors will generally set up as a limited liability company, an S corporation, or a C corporation. And while none of these options is particularly complex, choosing the best way to set up your business can be simplified with the counsel of financial and legal professionals.
How can I get an Employer Identification Number?
The easiest way to get a federal Employer Identification Number (EIN) – a business’s version of a Social Security Number – is to click here and follow the instructions. The link will take you to the IRS.gov site that discusses EINs, who needs one and how to go about getting the number.
I haven’t filed a tax return in some time. What should I do?
Seek the advice of a tax professional. The severity of the consequences depends on the accumulated tax liability and the source of the liability (payroll tax, sales tax, income tax). In addition to the tax liability, interest and penalties continue to accrue from the date the tax form was due until you file and pay.
Paying what you owe is crucial. Federal and state agencies will likely catch up with you as they find better, smarter ways to identify non-filers.