Not all incoming money is income

When your business gets money in, it’s easy to go into autopilot. Most of the times that happens, it’s probably income. But that’s not always the case. You need to think about everything you enter in.

Services and Products

When you get a check in, ask yourself if it’s for a service you’ve rendered or product you’ve sold. If so, it’s pretty straight forward. It will probably go against an invoice you created because you wanted someone to pay you. So you simply have to receive the payment.

But what about other situations? Not everything matches up perfectly with an invoice. Each transaction has to be considered individually and entered correctly.


At some point in their business, nearly everyone gets a check back because they overpaid a vendor. Of course, you want to avoid overpayment when you can, but that’s not always possible.

Let’s say your insurance rates change and you get some money back. What are you going to do with it?

Well, why did you get it? You didn’t get it because you provided a service or product. You got it because it was an overpayment. Was the amount paid appropriate at the time? Yes, you paid the amount due. So it’s not income, because you didn’t do anything to earn it.

So what do you do with it?

It’s just a deposit. You enter it against the expense line you incurred to begin with. In this example, the refund would be a credit to your insurance expense.

You might think, “Insurance is an expense, so I can’t credit it there.” Yes, you actually can. In that specific example, you know it was really a reduction of an expense, so you credit it to that expense.

Owner Contribution

Another example is owner contributions. I’ve often seen this with companies that are just starting out. They take an owner contribution and call it income. That’s the worst thing you can do!

If it sits in income, you have to pay income tax on it! In reality, it wasn’t income. It was a contribution by the owner to keep the lights on or make payroll. You didn’t do anything to earn it, so you need to categorize it as an owner contribution.

They key is to think about each and every transaction. Often it will match up perfectly with an invoice. But not always. So don’t let yourself slip into autopilot and make a costly mistake.

Bookkeeping blogs and resources

Whether you’re a long-time business owner or just getting started, you’re likely going to encounter some questions about bookkeeping and accounting along the way. While consulting with a professional is generally the best way to ensure you’re getting sound advice, there are a few online resources that can be helpful as well.

Here are three online resources that can be helpful for business owners who want to learn more about bookkeeping, find answers to specific questions, and ensure they’re doing things the right way.

Accounting Coach

Accounting Coach is a really great online resource with basic questions and answers about common accounting terms and concepts. It’s a good first step if you hear a term you don’t know or want a simple explanation of key concepts.

QuickBooks Tips & Tricks group on LinkedIn

This LinkedIn group is a wealth of information about all things QuickBooks. With more than 28,000 members, there have been a lot of questions asked in the group with a lot of great discussion in the responses. You can request to join and then review previous questions which may very well lead you to the answer you need.

Internal Revenue Service website

Okay, this one may seem a little obvious, but it’s honestly an overlooked resource by many business owners. If you’re using an IRS form of any kind, I recommend visiting to download the form every time you need it. The forms change over time, and you want to be sure you’re using the latest version. Plus, the IRS website has lots of useful information for small businesses, including all the details about what classifies as a deduction.

While these resources are great for quick answers about a specific topic and to ensure you’re following the IRS guidelines, it’s still beneficial to consult a professional for strategic guidance. A professional bookkeeper adds much more value than simply where to record debits and credits. They can review your accounts and help you understand how certain decisions impact the big picture, make sure you’re within all the necessary guidelines, and so much more.

Things to consider in nonprofit accounting

I come from a corporate background where the primary financial goal is to make money. While many of my clients are for-profit businesses, I also have some nonprofit clients, and I have volunteered with various nonprofit organizations. And it’s a different world, bookkeeping and accounting-wise, with some specific things to consider.

In the nonprofit world, you’re not trying to make money-your goals are to keep the organization running, and providing its services. That means the goal is to basically break even. If there’s a little bit left over that can be put into a specific program or an additional effort, that’s great, but breaking even is the norm.

Here are two important things to keep in mind regarding nonprofit accounting.

Do nonprofits have equity?

A balance sheet tells you where the organization stands financially. It has assets at the top, and liabilities below them. In the corporate world, and at the bottom of the balance sheet, the difference between the two is called equity, generally meaning the owners’ residual claim on the business assets. But in the nonprofit world, there’s no owner, which renders the term equity meaningless.

Rather, in the nonprofit world, the difference between assets and liabilities is referred to as Net Assets. There may still be some nonprofits who use the term equity, perhaps as a way to help readers, usually board members, to understand financial statements. But in formal financial statements of a nonprofit, Net Assets is the norm.

How should you handle restricted funds?

Another accounting issue to the nonprofit world is that of restricted funds, specifically the classification and use of donated restricted funds. The tracking of restricted funds, both their receipt and expenditure, is of primary importance to a nonprofit.

As the name implies, donations of restricted funds must be set aside and used toward a specific purpose, either as specified by the donor, or by board directive. Let’s say a nonprofit that serves families wants to build a new playground, and it gets a large donation specifically for that purpose. That donation is set aside to be used only for a new playground. Even if the roof starts leaking, or the air conditioner goes out and needs to be replaced, that specified donation is off limits, and must be used for the playground. Repair expenses must come from other sources.

Where it matters in bookkeeping is how you set things up. You should keep the cash equivalent of the restricted funds amount somewhere hard to access. I’ve seen some nonprofits simply say “Oh, we won’t let our operating bank account go below X amount, because that’s what we have designed as restricted funds.” But that is a dangerous approach, because it’s easy to eye those funds when the roof or air conditioning needs urgent attention.

The cleaner way to approach it for bookkeeping purposes is to put restricted funds in a separate bank account. Then, if you need to pull funds out of that account for a different purpose, it requires board approval and there’s a clear record of when and why it was done.

Whether you’re working at a nonprofit or serving on the board of one, it’s a good idea to keep these two things in mind regarding nonprofit accounting.

When should you consider a mid-year change?

I have a friend and neighbor whose lawn and garden always looks outstanding. It’s lush and green and beautiful. It’s the lawn everyone on the street envies.

To get that lush green lawn, he spent years amending the soil. He dug up a patch and showed me one time, and it was nice, loamy soil. As we were talking about his lawn and his process for amending the soil and planting things in his garden, I told him I never know when it’s the right time to do it.

His response? “Do it when you feel like it. If it doesn’t bloom this year, it’ll bloom next year.”

The same is true for your bookkeeping. Want to change your reporting method? Messed up your chart of accounts and need to make a fresh start? If you need to do it, then do it. You’ll be happy you made the choice and changed it.

People often think they need to wait until the first of the year to make any changes to their bookkeeping, but that’s not necessary for most small businesses. And let’s face it, there’s a lot of other things happening in January for any business, so you might not actually want to implement a new system then.

You don’t have to wait for the first of the year to do it. You can do it now.

Yes, making a mid-year correction to your process or your books might mean that pulling together information for your tax return next year is a little more complicated, but most bookkeepers and accountants are used to that happening sometimes. Check with your bookkeeper or CPA in advance and get their professional advice about the situation, then make the change if it’s necessary. In some cases, not making the change will create more problems than making it.

Sometimes in business, things don’t go as planned. You have a budget and a business plan, and it all looks great on paper. But then the real world happens. Maybe you recorded a deposit incorrectly or messed up your chart of accounts, but you know what happened to cause the problem. If you know what happened, that’s okay. If you don’t know why it happened, that’s a problem.

If something happens in your bookkeeping or in your business, you should document it, especially in small businesses with only a couple of people involved. When you’re looking at your books two years from now, you may not remember the specifics or the person who resolved the issue may not work with you anymore. Be sure to document any changes you make to your process or errors that occur in your bookkeeping-it’ll save you time and headaches later.

Seven common QuickBooks mistakes

QuickBooks is an incredibly powerful tool for small businesses, but like any tool with lots of options, it can get confusing and create problems if not used properly.

Here are seven common mistakes I see small businesses make in QuickBooks and the right way to do it instead.

1. Creating an invoice but not applying the payment to it

This is one of the most common mistakes I see in QuickBooks. When you create an invoice for a customer and then later receive that check, you need to enter it as money received against the invoice. If you will receive multiple checks before going to the bank, it’s best to enter them as undeposited funds first but also record them as money received against the invoice. That way, all six or eight checks show up as one deposit, which is how it looks at the bank also.

2. Not reconciling accounts regularly (or at all)

For many small business owners, bookkeeping may not top the list of their favorite tasks, so it’s common for people to fall behind on reconciling their accounts. The problem is, the longer you wait to do it, the more work it is. And you could be missing mistakes in the mean time.

If your statements come monthly, you should reconcile your account monthly as well. If some statements come quarterly, reconcile your account whenever you get the statement. It may depend on volume though. If you only have six total transactions in a month, you could probably wait a couple months and it would be fine. But if you’re writing 50 checks a month, running a debit card, and have payments on autopay, you absolutely need to reconcile every month.

3. Letting outstanding items go for too long

When you’re reconciling your accounts, it’s good to keep an eye on anything that’s outstanding. As a general rule of thumb, if something’s outstanding more than three months, it’s probably a good idea to reach out and ask them to deposit that check. Life happens, so a gentle nudge may help in case the check got buried in a stack of mail or something else.

Some other outstanding checks may be data entry errors, so it’s good to clear those up as well. If a check’s been outstanding more than six months, go ahead and stop payment so you can fully reconcile the account. If the person contacts you about the check later, you can write another one.

4. Not adding enough information to vendor and customer records

For new customers or vendors, be sure to add as much information as you can to their record. In QuickBooks, you want to focus on the information that will be needed related to billing and accounting. For customers, you want their billing address and phone numbers for key contacts. For vendors, you want the address where you’ll need to remit payment and the right contact for billing questions. If you have multiple contacts and numbers, enter multiples. And then keep that information current as contact people, phone numbers, or addresses change.

5. Failing to keep sales tax numbers updated

QuickBooks does a great job of managing sales tax requirements if you use it appropriately. The best approach is to use tiered taxes so that you enter city, state, or county tax rates separately. When you invoice, those will roll up into one sales tax rate for your customers. If something changes with one of those tax rates, it’s easy to change it in one place with the tiered approach.

6. Creating chart of account categories that are too broad

When it comes to your chart of accounts, it’s easier to add things together than break things apart. If you create extremely broad categories and put lots of expenses in them, it takes a lot of effort to sort those into more detail. But if you create more categories than you need, it’s much easier to add two categories together at a later date. If in doubt, go ahead and add that extra category. You can always change it later if you don’t really need it.

7. Having too many vendors in the vendor list

When recording expenses, you don’t need to enter every single restaurant, gas station, and hotel in your vendor list. If you have some large vendors with whom you do a lot of business, it might make sense to specify those vendors. But otherwise, I recommend approaching vendors on more of a category approach, which means creating a vendor list that includes airlines, auto maintenance, food vendor, gas station, hotel/lodging, etc. Then, as you record a specific expense, you can list it under the appropriate vendor category and use the vendor name in the Ref field to make reconciliations easier.

Ethics and bookkeeping

What should a bookkeeper consider when it comes to gray areas? Doing the right thing is something every industry deals with, but bookkeeping can be somewhat unique. We are exposed to information and risks nobody else in the company is, aside from the directors and owners.

It comes down to a combination of doing what’s right and risk management, both for myself and my client.

There are a couple different situations I can be in as a bookkeeper where ethics and risk management come into play.

First, there may be a case where I think my client is in somewhat of a gray area on what they’ve asked me to do.

Everyone has their own sense of right and wrong. When my client has asked for something in a gray area, it comes down to risk management. In those cases, it can be easy for me to say, “If you can defend this in front of the IRS, then do it. If you can’t, then don’t.”

Second, there may be a case where I think something my client is asking me to do isn’t ethical.

Even in cases where I don’t have legal responsibility to the IRS because I didn’t make the actual decision, I still may have ethical responsibility in the situation.

Of course, I can decide that’s a client I don’t want to work with any longer. Usually one unethical request like that means more may be coming in the future.

And who ends up getting blamed? The bookkeeper. My clients are just as susceptible to human nature as anyone else, and people in a crunch situation tend to forget who made the actual decision.

Fortunately, I’ve never had a client audited where that was the situation. In fact, I’ve only had one client audited. They were working with a CPA as well, so the CPA handled everything. And we already had everything in order, so it wasn’t an issue.

But when difficult decisions come up, I have to consider both the ethical responsibility and the legal obligation. I have to do what’s best for both my client and myself.

Tracking and paying use tax

When it comes to use tax, businesses generally fall into one of three categories: those who have no idea what it is, those who know what it is but don't pay it consistently (or at all), and those who have a system for tracking and paying it.

What exactly is a use tax?

It's similar to sales tax, but it's specifically applied to items you purchase from an out-of-state vendor where no sales tax is applied at the time of purchase. The purchaser of such items is responsible for tracking the items they purchase that are subject to use tax and submitting payments to the state of Oklahoma.

Some people view use taxes as a voluntary payment or think the state won't catch them if they fail to pay. But if you undergo a sales tax audit, which can happen to any business, you'll end up paying both the original use tax plus penalties and interest. And, more importantly, paying the use tax is simply the right thing to do.

How should you track use tax?

Whether you're using a bookkeeping software or basic spreadsheets, you can track use tax at the time you enter your purchase.

The use tax is calculated on the price of the product and not on shipping or other fees. So if your item costs $100 and you paid $10 in shipping, calculate the use tax on only the base price of $100 using the use tax rate for the zip code where the product was shipped. You can find use taxes by zip code online using the Oklahoma Tax Commission's online rate locator.

The first thing I do is write "use tax" on the top of the receipt and write my calculations directly on the receipt so I have the hard copy record.

Enter the total of the product cost, shipping, and use tax amount as an expense in your bookkeeping system. In this case, the total might be $118.50 after use tax is applied to the $110 you paid for the product plus shipping. Then enter a credit for that same item in the amount of the use tax, or $8.50 in this case. File your hard copy receipt in a specific folder for items subject to use tax so you'll have everything you need to file and pay use taxes.

How often should I submit use taxes to the state?

For most businesses, I recommend submitting the appropriate form and payment to the state on a monthly basis. That way it's simply part of your monthly bookkeeping routine and not something you're likely to forget. If you don't have any use tax to pay during a specific month, you don't need to file the form.

What else should I know about use tax?

At one point in time, all online purchases through Amazon were subject to use tax. That changed when the state of Oklahoma worked with Amazon to start collecting sales tax on purchases. However, some smaller sellers who use Amazon's platform to sell goods may not be collecting sales tax, so it's still important to keep an eye on your receipts and submit use tax for any items that were not charged sales tax.

For businesses that keep an inventory of products, such as an IT company with extra hard drives, those purchases may not be subject to sales tax at the time of purchase. However, if the inventory is put into use at the company, then use tax applies.

Businesses with inventory or questions about use tax may contact a CPA or a bookkeeper for more information about what products are subject to use tax.

Yes, you need a receipt

It’s that time of year... tax season is upon us! For many small business owners, that means it’s time to gather receipts from the various places you may have stashed receipts throughout the year. Trust me when I say that bookkeepers and tax preparers have seen it all, from the highly organized and fully documented receipt files to the completely unorganized box full of relevant and irrelevant papers.

Why do receipts matter so much? If you’re deducting expenses for your business, your chances of being audited automatically increase. While the overall chance of being audited is relatively small, the chances increase based on specific criteria, such as sole proprietors who file a Schedule C with their tax return.

Receipts are your proof that a valid, deductible business expense occurred. Your credit card statement isn’t enough, as it doesn’t provide all the necessary information. In fact, even the receipt alone isn’t enough if audited-you also need documentation of who you met with, the purpose of the meeting, and so on.

Whether you’re gathering receipts for your 2017 tax return or documenting them along the way for 2018, here are important things to document for each business expense.

Date and time

Date and time seems pretty simple to capture from a receipt, but it’s not always listed on every receipt. When you incur a business expense, check the receipt to ensure the date and time are printed on the receipt. If not, write it on the receipt before filing the receipt or submitting it to your bookkeeper.

People involved

The IRS has very specific rules surrounding meals and entertainment expenses for business deductions. If your expense involves a meal or other entertainment (such as sporting event), it’s critical to document who attended the meeting or event.

And no, setting up shop at the local Panera and working for a few hours while you eat breakfast doesn’t count as a deductible business expense. It can be an expense the company pays for, but it isn’t one you can deduct on your taxes.

Purpose of meeting or expense

It’s also important to document the purpose of the expense. Why did you need 100 pens? What business topics were discussed at that lunch meeting? How much business did you conduct on that trip to Florida? If audited, the IRS will expect documentation on what business topics were discussed or how other items were used for your business.

The best practice for all business owners is to write these details on the back of a receipt at the time of purchase and then file them in a specific place so they’re easy to find come tax time next year. You’ll need the receipts to enter into your bookkeeping software, but you’ll also need to store them for several years in case of an audit. The more organized you are with your receipts, the easier it will be to prepare taxes and respond to an audit.

Three tips for working with a bookkeeper

There are many different ways we work with clients, and the same is likely true of many accounting or bookkeeping companies. I’ve often had companies ask me if I can provide a specific level of service, but they don’t realize that there’s still some level of involvement or input required on their part.

For small businesses looking to outsource their books, here are some important things to keep in mind as you start working with a bookkeeper.

Identify the desired level of support

Over the years, I’ve worked with some clients who simply needed periodic consulting about their bookkeeping setup. I might meet with them a couple of times to work through an issue, and then I might not consult with them again for six months to a year.

But the more common scenario is either a client who wants some monthly support with entering expenses and income, and keeping the books on track, or one who wants even the day-to-day bookkeeping tasks handled for them, such as making deposits and paying bills.

And sometimes, clients need a complete overhaul. I once had a client who had two different systems for tracking their accounts, and the two pieces together didn’t add up to 100%. Sometimes in those situations, the best course of action is to start fresh, but your bookkeeping consultant can advise you on that.

Recognize your role in the process

Even for those clients who ask me to handle all the details, the client still has to be involved in the process. After all, it’s their business!

The extent to which a business owner is involved will vary a bit depending on their history with bookkeeping and what program and process they use. But even those with a great track record for keeping things current will still need to communicate with their bookkeeping or accounting partner.

Find a consultant you trust

You’re handing over significant details about your business, so it’s important to find a partner that you trust. For most people in the field, numbers are numbers, whether it’s a $20,000 business or a $5 million business. But for the business owner, those numbers can be very personal, and it may be hard to give someone the level of access needed to help.

Before you contract with a bookkeeping consultant, have some honest conversations about your current situation and how you want them to help. If your books are out of control and you need someone to get them in order, expect to spend time answering questions and adapting to new processes. Keep in mind that a good bookkeeper is going to nag you for receipts-it’s their job!

No entrepreneur woke up and decided to go into business so he or she could do bookkeeping on the weekends after providing a product or service all week. It’s not uncommon for small businesses to get behind, but hiring a professional to help with your books can keep you on track and in business.

The best way to give gifts to your employees

Showing appreciation to your employees for their dedication and hard work is vital within a company. It’s a key factor in employee morale, which is important for the ongoing success of your organization.

But how does an employer know whether a gift to an employee is taxable? This is where de minimis comes in to play, which roughly translates to “about minimal things.” Under this concept, an employer can do something for an employee-such as a small gesture of appreciation-without it being taxable.

For instance, if you gave $5 Sonic gift cards for the first three people who made a suggestion on improving the parking lot, that likely would not be taxable. It’s a small way to show appreciation and have fun, but it’s not considered a cash equivalent.

However, using larger or frequent cash gifts can get you into trouble quickly. Giving out cash to employees adds up, and the total amount must be tracked and taxed. For instance, I had one experience where a boss wanted to give all employees cash to buy their turkey for the holidays. The company made the wise decisions to instead buy the turkeys and hand them out. Although that took more time, giving the employees cash would require completing a W2.

If you’re debating whether to give a tangible gift versus cash, you’re usually best to go with the actual gift and not the cash.

Gym memberships are another place where the question of taxable income comes into play. It’s not a traditional gift, but it is an employee perk. An on-site fitness center can be a huge benefit for employees, and a lot of larger companies are offering that as an option. If the gym is on-site and available for all to use, it counts as a company expense. In contrast, if you paid for an outside gym membership for employees, then it becomes taxable income.

Some other things that are included in de minimus are:

  • Occasional use of the photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Occasional tickets for entertainment
  • Holiday gifts
  • Flowers, fruit, books, etc., under special circumstance

The idea is to take care of your employees who work hard for the company and keep morale up while being financially responsible for the well-being of the company. Make sure you think ahead about employee gifts and the potential tax impact.