Contractor Accounting: Cash Flows
Tuesday, October 23, 2007
This is part of a series called Contractor Accounting 101:We've discussed two important financial statements for small businesses - the income statement and balance sheet. Another important analytical tool is the Cash Flow Statement. It shows how well your business can pay its bills.
Your Cash Flow Statement indicates money coming in and going out over a period of time. Make sure you look at cash flow every month or at least every quarter. Cash flow can be from normal day-to-day operations, investing or financing activities.
These activities include cash coming in from a completed job, going out for supplies, payments on credit cards, or interest received from a savings account. It can be money in from the sale of equipment or out for the purchase of a showroom. This statement is not a calculation of profit but shows how much money you start with, how much comes in, how much goes out, and how much you're left with at the end of the period.
Say you start January with $25,000. You have $12,000 coming in from sales, $3,000 from what previous customers owe, and $5,000 from the sale of a vehicle. You plan to have $15,000 of cash coming in for January. However, you'll be paying $1,000 in rent, a $500 truck payment, $6,500 in payroll, and $10,000 in products. You'll also have an owner withdrawal of $3,000. You'll have $21,000 in cash going out for the month of January.
Your change of cash will be "- $6,000" ($15,000 cash in subtracted by $21,000 cash out.) Obviously, it's important to maintain positive cash flow. But it shows you'll need additional sales for the month or a cut in expenses (reducing payroll or purchases.) Your ending monthly balance will be $19,000 ($25,000 beg. balance minus $6,000 cash flow change.) That ending balance will be your beginning balance for February.
RELATED POSTS:
Contractor Accounting: An Introduction
Cash Accounting vs. Accrual
The Accounting Equation
Types of Accounts
Financial Statements
Labels: Accounting
Contractor Accounting: Financial Statements
Friday, October 05, 2007
This is an ongoing series called Contractor Accounting 101.
Financial Statements:
After organizing all your company transactions into accounts, it is important to use this information to describe your business. Financial statements pull numbers together at the end of a month, quarter, or yearly cycle. The most important statements you’ll use are the Balance Sheet and Profit and Loss. They must be viewed together and they must be viewed often. The Balance Sheet is the same as the Accounting Equation:
Assets = Liabilities and Owner Equity
(For a review of the Accounting Equation, go here)
The Balance Sheet is a snapshot of your company at that time. It lists the Assets (Cash, Vehicles, Accounts Payable), Liabilities (Accounts Receivable) and Owner Equity (Your investment in the business, Earnings, etc.)
A Profit and Loss statement looks at the money generated (Revenue), minus the cost of products and labor (Gross Profit), minus the cost of operating expenses (Net Income or Loss). This statement is for a period of time – unlike the Balance Sheet, which is a moment in time.
Here is a sample Profit and Loss Statement (also called an Income Statement):
After you record your Net Income in the Profit and Loss statement, place this amount in your Balance Sheet. It is part of the Owner Equity, called Current Year Earnings. Year after year, the Current Year Earnings account is closed and put into a permanent account called Retained Earnings.
RELATED POSTS:
Contractor Accounting 101
Cash vs. Accrual Accounting
The Accounting Equation
Types of Accounts
Financial Statements:
After organizing all your company transactions into accounts, it is important to use this information to describe your business. Financial statements pull numbers together at the end of a month, quarter, or yearly cycle. The most important statements you’ll use are the Balance Sheet and Profit and Loss. They must be viewed together and they must be viewed often. The Balance Sheet is the same as the Accounting Equation:
Assets = Liabilities and Owner Equity
(For a review of the Accounting Equation, go here)
The Balance Sheet is a snapshot of your company at that time. It lists the Assets (Cash, Vehicles, Accounts Payable), Liabilities (Accounts Receivable) and Owner Equity (Your investment in the business, Earnings, etc.)
A Profit and Loss statement looks at the money generated (Revenue), minus the cost of products and labor (Gross Profit), minus the cost of operating expenses (Net Income or Loss). This statement is for a period of time – unlike the Balance Sheet, which is a moment in time.
Here is a sample Profit and Loss Statement (also called an Income Statement):
After you record your Net Income in the Profit and Loss statement, place this amount in your Balance Sheet. It is part of the Owner Equity, called Current Year Earnings. Year after year, the Current Year Earnings account is closed and put into a permanent account called Retained Earnings.
RELATED POSTS:
Contractor Accounting 101
Cash vs. Accrual Accounting
The Accounting Equation
Types of Accounts
Labels: Accounting
Contractor Accounting: Types of Accounts
Monday, October 01, 2007
This is an ongoing series called Contractor Accounting 101:When you're organizing all your company transactions (deposits, payments, accounts receivables), you want to create accounts which go beyond just recording debits and credits. There are 5 types of accounts (and these can be expanded into sub-accounts to provide you with more information.) There are Asset accounts, Liability, Equity, Revenue, and Expenses.
- Asset Accounts are what you own.
- Liability accounts are amounts you owe.
- Equity accounts are what you own after liabilities are removed.
- Revenue accounts include money brought into your business.
- And Expenses accounts are what you spent to generate revenue.
For example, entries in an Asset might include:
1000 Petty Cash
1100 Checking Account
1200 Vehicles
1300 Tools & Equipment
And entries in a Liability account would look like this:
2000 Accounts Payable
2100 Payroll Tax Payable
2200 Health Insurance Payable
2300 Other Current Liabilities
Many accounting software programs will handle updating all your purchases, payments, and revenue. But, if you were to do it all by hand, you would use what's called the Double Entry Method. It allows you to use your Accounts to keep track of money coming in and going out. Even though it's called "double entry", more than one account may be affected.
Here is an example of how each of your accounts is affected. Say you make a purchase of a new drill press. It would add $250 to your Tools & Equipment account as a Debit. And there would be a Credit to your Checking Account of $250. A Debit is listed in the left hand column of any account when it comes in to the account.
A Credit is listed in the right hand column whenever it leaves an account. $250 came in to Tools account. $250 went out of the Checking Account.
RELATED POSTS:
Contractor Accounting 101 - an Introduction
Cash Accounting vs. Accrual
The Accounting Equation
Labels: Accounting
Contractor Accounting: The Accounting Equation
Thursday, September 20, 2007
This is an ongoing series called "Contractor Accouting 101": Accounting is the process of taking into account all your business transactions, along with what you owe and who owes you. It's an evaluation of your company resources. Nearly every business has assets and the best way to determine who has a claim to those assets is to use the Accounting Equation. The equation is stated like this: Assets = Liabilities + Owner Equity
Assets can be a company truck, a showroom, tools, products, telephones or computers. These items are considered valuable resources. On the other side of the equation are Liabilities and Owner Equity. Any money that your business owes is a liability. And anything left over, after Liabilities are subtracted from Assets, is the Owner Equity.But, the Owner Equity has increased by $50 ($100 (Assets) = $50 (Liabilities) + $50 (Owner Equity)).Every transaction you have affects this equation. Say your business has $20,000 in the bank. You owe $5,000 for supplies. That would mean that your Owner Equity in the company is $15,000. ($20,000 = $5,000 + $15,00). And if you were to take $2,000 from the cash Asset to pay down the debt, your new Accounting Equation will look like this: $18,000 (Asset) = $3,000 (Liability) + $15,000 (Owner Equity).
You no longer have as much cash, but you also do not owe as much for your supplies. The same can be true if you add Assets to your company.
Say you have $20,000 in Cash. You owe $5,000. Which means you have $15,000 in Owner Equity. You then add $4,000 worth of tools. You used credit to make your purchase. Your new Accounting Equation looks like this:
$24,000 ($20,000 Cash + $4,000 Tools) = $9,000 + $15,000
Or
$24,000 (Assets) = $9,000 (Liabilities) + $15,000 (Owner Equity)
The Accounting Equation is a crucial part of your company balance sheet and profit and loss reports.
Next Topic - Accounts
RELATED POSTS:
Contractor Accounting 101 - An Introduction
Cash Accounting vs. Accrual
Labels: Accounting
Contractor Accounting: Cash Accounting vs Accrual
Thursday, September 13, 2007
This is an ongoing series called Contractor Accounting 101:If you haven't done so, you'll need to decide whether your business will track accounting on a cash basis or an accrual basis. But those are annoying technical terms. What it means is how will you report expenses and income to the IRS? It's important because the tax man wants you to be consistent with this on a year to year basis. If you choose Cash or Accrual for one year, you'll have to do every year.
What is Cash Accounting?
This may sound simple, but cash accounting means that you count the income when you receive a payment. Or you count the expense when you make a purchase. You only record a transaction once everything is completed and nothing else is outstanding. Remeber that transactions are normal business activities - buying a tool, depositing a check, sending out an invoice, etc.
What is Accrual Accounting?
This method can be more complicated. In accrual accounting, you're counting income at the same time you send out your bill to a customer. Even though the customer might not send you a check for 21 days, you're counting the money immediately. It's the same for any expenses you have. If you owe money for a purchase (accounts payable) and you won't be paying until next month, you still count that expense immediately.
You can see where these methods might cause confusion or problems. Which is best? Cash accounting is similar to balancing your checkbook. Money in and money out. It's the best for any business that doesn't have problems collecting payments.
Accrual accounting is like using a credit card instead of a check to buy something. Even if you buy with a credit card, and you instantly write out a check and make your payment, you're still using accrual. With accrual, it is easier to match your income to your expenses because they are counted instantly. It makes you more accountable and helps you track exactly how profitable your company is. It's more expensive and time consuming to use accrual accounting, but you'll know exactly how well your company is doing and might prevent problems down the road.
RELATED POSTS:
Contractor Accounting 101 - Introduction
The Accounting Equation
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Labels: Accounting
Contractor Accounting 101
Friday, September 07, 2007
Contractors and service pros are good at what they do - building, renovating, installing and repairing. Unfortunately, owning a business means you also must be good at business. At Construction Deal.com, our goal is to help your company succeed. So we wanted to help those who might need help with the accounting side of owning a business. This might be remedial for some business owners, but we'll move on to more complicated topics that might provide you with a few tips and tricks.First, it's very important to keep track of everything that happens with your business. These are called transactions. If you purchase tools, deposit a check, have a truck repaired, pay subs, or pay insurance, you'll need to hold on to receipts and enter the details and amounts in a ledger or computer program. Even if the transaction doesn't include money changing hands -- write it down. For example, if you receive a bill for lumber or you've just sent your bill to a customer and money won't exchange hands until next month.
All these transactions have accounting terms and it's how you can keep track of how well your business is doing. It's a great way to ensure your company will be around for years to come. These terms include income (deposits), assets (tool purchases), liabilities (insurance payments), accounts payable (lumber invoice), accounts receivable (a customer invoice), and more. We'll bring these terms up often as we continue through the process.
Next, it is important to consider your accounting cycle. This refers to the period of time you'll be keeping track of expenses and income. It could be a year, a month, a quarter. You could do it by year, but I recommend not waiting until the end of the year to pull out a big box of receipts. Doing it little by little will prevent those end-of-the-year headaches. Your year doesn't have to be January to December either. It can be from "busy season" to "busy season." Or April to April (tax time.) But whatever cycle you choose, stick with it.
RELATED POSTS:
Cash Accounting vs. Accrual Accounting
The Accounting Equation
Which is best for your business?
Labels: Accounting
