CHAPTER
6

Doing Business Day to Day

In This Chapter

• Recording and accounting for sources of revenue
• Recording and paying your bills
• Recording and managing inventory levels
• Recording and managing payroll

In Chapter 1, we provided an overview of typical accounting transactions; in this chapter, we look at those in more depth. We describe the most common types of accounting transactions you’ll perform in your accounting software. The frequency with which you’ll carry out any of these transactions depends on the nature of your business, and you might not need to carry out every type of transaction. In some cases, we describe more than one way to carry out the same transaction. In doing so, we try to show you the most efficient means for your situation.

You might be surprised to find that there are actually a couple different ways to record customer-related transactions in your books. We explain why and when you might choose each. We also discuss paying suppliers and vendors, with special emphasis on purchasing inventory. We touch on payroll, too, because the steps can vary among accounting programs.

Recording Sales

Unless you happen to run a foundation tasked with spending down a billionaire’s wealth, sales are going to be a critical part of your business operation. We don’t mean sales in the sense of 50 PERCENT OFF! EVERYTHING MUST GO! posters. Rather, accountants use the word sales as an all-encompassing term for revenue a business generates. Revenue refers to money your business earns from selling goods and/or providing services.

Depending on your business, you might get paid on the spot by your customer, or you might have to submit an invoice and wait to receive payment. You’ll record transactions where you have immediate payment as sales receipts; otherwise, you’ll record an invoice and keep track of your customers individually.

Customer Records

Your accounting software should offer some leeway on when you add new customers to your accounting records. A Customers button or menu should appear prominently within your software. This typically allows you to access a list of customers, and you’ll be able to easily add new customers as needed. As shown in the following figure, the new customer window in your software allows you to add a variety of information about your customers, including payment terms, which we discuss in Chapter 13.

Most fields within a new customer record are optional and can be completed at your discretion.

However, you don’t always have to go to this area of your software to create a customer-related transaction. As you’ll see later in this chapter, if you attempt to create a transaction using an ID or customer name that doesn’t yet exist in your records, your accounting software will ask if you want to create a new customer.

ACCOUNTING HACK

Your accounting software requires you to create a unique identifier for each customer. One way to make your accounting easier is to use as much of a customer’s name as fits in the ID field. Customer IDs may be limited to 20 characters or fewer, so you might have to use letter and number combinations, such as BBB001 instead of spelling out Bob’s Big Bonanza.

Sales Receipts

This type of transaction allows you to directly record sales to your cash account and revenue account in one step. As shown in the following figure, a sales receipt looks much like an invoice but is used to record immediate payments.

Some programs, such as the desktop version of QuickBooks, provide a dedicated Sales Receipt screen, while others, such as Sage 50, offers a Receive Money window that serves double-duty, meaning you can apply payments against invoices and record sales receipt activity in a single transaction if you want.

With regard to sales receipt transactions, if you perform consulting services, a customer may occasionally surprise you by offering to write you a check when you leave for the day. In this situation, there’s no need to record an invoice and then apply payment against it—you already have the money in hand.

Sales receipts also provide an easy way to post a summary of your day’s sales, such as when you use a point-of-sale software that operates separately from your accounting software to handle customer interactions.

If your business is strictly cash-based, such as a hot dog cart, you can record one sales receipt per day to post your sales.

If your business accepts credit cards, you might need to use one or more journal entries to record transactions for a given day’s sales. For example, you’ll likely take any cash and checks to the bank all at once while you could receive separate deposits for American Express, Discover, and Visa/MasterCard transactions.

Receive Money in Sage 50 is the equivalent of Sales Receipt in other accounting programs.

Depending on which accounting software you use, you might have to create a customer record for every sales receipt transaction. So if someone only needs something from your business one time, you still have to add them to your customer list. However, you don’t necessarily need to fill in all the fields in the new customer record. Completing the customer ID and customer name should suffice, although your accounting software might prompt you for additional required fields. If you use Sage 50, you can skip over the Customer ID field in the Receive Money window and complete the Name field instead. This eliminates the need to set up a customer for a one-time transaction.

Many businesses have a mix of regular customers who purchase on a recurring basis, and one-time buyers who may or may not purchase again. Setting up a general customer ID such as “Walk-In Customer” enables you to record the one-time buyer but still be able to use the many sales analysis reports that come with the accounting software.

The details of completing a sales receipt are similar to creating an invoice, which we cover next.

BOTTOM LINE

Each amount to be deposited in your bank account from a given day’s sales should be recorded on a separate sales receipt or journal entry. When you reconcile your bank account (more on this in Chapter 8), you want to be able to clear each amount individually. For instance, your Visa/MasterCard sales for the 29th of the month might deposit to your account on the 30th, while the American Express deposit might not appear in your account until the 1st. Listing each separately helps you keep better track.

Invoices

Many businesses are unwitting lenders, delivering goods or services to a customer before payment is rendered. In these situations, you’ll record an invoice to note the amount due.

When you post an invoice to your books, typically your accounts receivable account is increased by the amount of the invoice, as are one or more revenue accounts.

You can include many items on an invoice, but usually there’s some upper limit. For instance, Sage 50 limits invoices to 160 lines. The first time you create an invoice, your accounting software will require you to create a customer. This is an action you can carry out on the fly in your software. Simply type a customer name in the invoice screen, and respond to the on-screen prompts.

Invoice transactions record sales of goods and services that customers will remit payment for at a later date.

RED FLAG

Your accounting software might offer a Quick Add feature, similar to what’s offered in the desktop versions of QuickBooks. This is designed to be a convenience, allowing you to create a customer ID without leaving the transaction screen. The downside is you might not have the opportunity to fill in the customer’s address and/or email. If you mail printed copies of your invoices, you might not notice a missing address until after you’ve generated the paper invoice.

Accounting program transaction windows are typically separated into three unlabeled sections: header information at the top, line item details in the middle, and total information at the bottom.

For invoices, the header section includes information about your customer, the transaction date, a due date, and payment terms. Depending on the software you use, you might be able to turn other header fields on or off, such as Ship Via to indicate a shipping method, Purchase Order Number if your customer requires you to reference their customer number, and possibly a Sales Rep field if you have commissioned salespeople.

Within the line item section, you’ll detail the products or services being sold to your customer. Some accounting programs, such as the desktop versions of QuickBooks, only allow you to add items to your invoice that appear on your inventory item list. Note that in this case, services you sell have to be categorized as inventory items as well.

RED FLAG

Tread carefully if your accounting software doesn’t require you to choose an item ID for each line item. As mentioned in Chapter 5, inventory items of all types can streamline your invoicing process. More importantly, you must choose item IDs for inventory items you sell so your accounting software can post the requisite cost of goods sold entries and adjust the quantity for each item you have on hand. Further, if you don’t have to choose an inventory item, you need to pay attention to the general ledger accounts the transactions are posted to. This is an area that can cause problems in your general ledger and financial statements, such as those we discuss in Chapter 7.

If you sell physical goods that you keep in stock, be sure to record sales as soon as possible so your software inventory records are always up to date. You don’t want to deflate a customer’s expectations, and possibly lose sales, when you can’t deliver a requested item because you were behind on paperwork.

In other cases, you might want to reserve inventory items on a customer’s behalf so you can ship them as soon as you receive them. To do so, you’ll use a transaction similar to an invoice known as a sales order, which we talk more about later in this chapter.

Receiving Payment

You might end up receiving payments from customers in a variety of ways. Depending on your business, your customers might pay in cash for the most part, write checks at the time of delivery, or mail in checks. Some might be able to pay you electronically through ACH transactions, and others might pay by credit card. No matter the method, you’ll follow the same approach in your accounting software.

Although the exact name of the command varies by program, you’ll have the equivalent of the Receive Payment window shown in the following figure. Within this window, you’ll choose a customer and get a list of their outstanding invoices. If a customer is paying a bill in full, you’ll usually be able to check a box to enter the full invoice amount, or you can type in the actual amount paid. The header section of this window enables you to specify a payment method if you want to track the different ways customers pay their invoices.

Most accounting programs offer a Receive Payment screen; in Xero, you must select an existing invoice and post the payment at the bottom of the screen.

Customers who pay by credit card might complicate your accounting somewhat. Credit card processing generally results in fees that are usually a small percentage of the transaction (typically 2 to 4 percent) and sometimes an additional per-transaction fee of perhaps 30 to 50 cents. Financial institutions take two approaches for posting these amounts to your bank account.

Some deposit the full transaction amount and then deduct the transaction fees in one lump sum per month. In this case, you can mark the invoice as paid in the same fashion you would for a check.

Others post a deposit that’s the net of the transaction fees. In these situations, you need to mark the invoice as paid in full, but also record a discount that reflects the credit card transaction fee so the net amount is reflected in your bank account and your accounting records.

Making Bank Deposits

When you record payments from customers, don’t panic if you don’t immediately see the amounts in your Cash account within your accounting software. Some programs establish a special asset account, referred to as Undeposited Funds. This allows you to aggregate two or more customer payments into a single transaction that will post to your bank account. Doing so makes reconciling your bank account, which we discuss in Chapter 8, much easier.

As shown in the following figure, the deposit feature within your accounting software offers another unexpected opportunity. Tucked away within many accounting programs’ deposit screen you’ll find the capability to print deposit tickets. To use this feature, you do have to purchase preprinted deposit forms, but in the end, this can save you time and money because you won’t have to spend time handwriting and calculating totals for bank deposits, and you avoid potential fees your bank may charge for submitting deposits with an incorrect total at the bottom.

It’s also possible that you can deposit checks without even going to the bank. Businesses with large volumes of checks can rent check scanners that enable you to zip through sending batches of checks to the bank. Your bank might also offer an app that enables you to use a mobile device to take a picture of the front and back of checks you want to deposit. Such services are primarily offered through personal bank accounts as of this writing, but your bank might offer it for commercial accounts as well.

Printing deposit slips from your accounting software saves time versus handwriting and ensures your records match the bank’s records.

Sales Orders

Your accounting program might offer the ability to generate sales orders for customers. As we discuss in Chapter 7, these are nonposting transactions that won’t affect your general ledger or financial statements. However, sales orders can be a powerful inventory management tool.

You create sales orders in a similar fashion to sales receipts and invoices; the transaction form looks almost identical. The distinction is that sales orders offer several inventory management features invoices don’t, including the following:

• Your accounting software likely enables you to print a pick list report that tells you which items to pull from inventory.
• Certain inventory reports show you the quantity on sales orders for given items. This helps you stay on top of backorders and determine if you need to seek an alternate source for in-demand products.
• You might be able to configure your accounting software to include items on sales orders when reporting the quantity on hand. This can prevent you from overselling products.
• Your accounting program might let you automatically generate a purchase order for inventory items with insufficient stock. (We discuss purchase orders later in this chapter.)

Another benefit of sales orders is that you can convert all or part of the sales order to an invoice. When you do so, any inventory items are taken out of stock, as opposed to potentially being earmarked. After you ship all the items on the sales order, your accounting software marks the sales order as closed, but you also have the option to do so whenever a partial shipment is suitable or when the order is canceled.

You can record these on either an invoice or a sales receipt, but take care to record these transactions carefully. Depending on your software, you might be required to establish an ID for Prepayment, Retainer, or Deposit; or you might be able to leave that field blank and choose a liability account instead.

Once the work is completed and you’re doing the final billing, you’ll need to apply the prepayment against the invoice. It’s at this point that the money shifts on your books from a liability to revenue earned.

The specific means by which you apply the prepayment varies based on your accounting software. Typically you’ll add a line item at the end of the invoice and enter the amount of the prepayment you’re applying as a negative amount posted to the liability account.

RED FLAG

Retainers or deposits customers pay to you aren’t necessarily your money yet and should be recorded on your books as a liability. You could treat a nonrefundable retainer or deposit as income on your books, but be sure you have a signed agreement with your customer for this. Further, if you prematurely record a deposit or retainer as income, you might end up paying income taxes on the money prematurely. It gets more complicated if you have to refund the customer’s money for some reason. Conversely, if you don’t apply a prepayment properly when invoicing, you might leave a phantom liability on your books and unnecessarily pay income taxes on nonexisting income.

Other Invoicing-Related Transactions

Sometimes a customer might want to return an item or request a discount on services not rendered to their satisfaction. In these cases, your accounting software enables you to prepare a credit memo. The exact procedures and capabilities vary based on your specific accounting software, but generally, credit memos enable you to return inventory items to stock and provide discounts for services. You might be able to apply the credit memo directly against an open invoice, or you might have to match the credit memo and invoice together manually, as we discuss in Chapter 13.

Depending on the nature of your business and your accounting software, you might have the option of issuing progress billing invoices. This is typically an advanced option you’ll need to enable or search for in specific programs, but it enables you to generate multiple invoices for a project based on the percentage complete or other milestones.

Another option you might have is preparing estimates. An estimate is similar to a sales order, but it won’t earmark inventory. Be sure to include language on estimates that allows you to reserve the right to change the estimate, and mention that if there are changes, you’ll contact the customer for approval before performing any work beyond the costs shown on the original estimate.

DEFINITION

An estimate, sometimes referred to as a quote, is a proposal or bid for a job wherein you set out how much you think it will cost the purchaser based on particular circumstances.

Programs that offer estimating capabilities enable you to convert an estimate to a sales order or invoice without retyping it, which can be a big timesaver. Entering estimates in your accounting software can be a helpful tracking mechanism, and you’ll have the option to delete or mark the estimate as closed should your customer fail to approve.

Paying Bills

You’ll likely spend more time than you care to paying bills for your business. The process of entering and paying bills is very similar to how you enter customer invoices, so we won’t go into as much detail here. Your accounting software permits you to process bills in the style that suits you.

You can enter bills as you receive them and then process payment all at once, such as on Fridays or on the third Tuesday of every month. Look for a command labeled Enter Bills, Receive Items, or perhaps Purchases/Receive Inventory. (We discuss the nuances of bills for physical inventory items later in this chapter.) Bills you enter in this fashion appear on your Aged Payables report (more on that in Chapter 13).

A separate command along the lines of Pay Bills enables you print checks for multiple bills at once based on selections you make. This functions in a similar fashion to the Make Deposits command discussed previously.

Or you can simply write checks for bills when you’re ready to pay them. If you pay a bill on the spot, it’s unnecessary to enter a bill transaction first. Just write the check directly, using a form such as Write Checks or Spend Money.

Your accounting software may allow you to pay your bills electronically. If so, you’ll process payments as described, but instead of printing checks, you’ll send the transactions to your bank, which will print and mail checks or send electronic payments.

If your software doesn’t allow you to send transactions directly, or requires fees for such services, you probably can initiate electronic bill payments through your bank’s website. You’ll enter these payments in your accounting software in the same fashion you would a paper check, but you won’t need to print an actual document. You simply make up a check number or use the word Online if your software requires the check number field to be completed.

Most accounting programs have a Write Checks screen; Xero calls it Spend Money.

ACCOUNTING HACK

Some small businesses hand-write checks when issuing payments. This results in extra work because handwritten checks must be entered into the accounting software and then an envelope must be addressed for the payee. Every accounting program allows you to print checks directly. So once you sign the check, you can send it in a window envelope. You can purchase computer checks from your bank, from your software provider, or through third-party check printing services.

Credit Card Purchases

A business credit card can simplify your accounting because instead of writing multiple checks to various vendors, you simply write one check per month to the credit card issuer.

You might have as many as three ways to record credit card transactions in your books. Your accounting software might allow you to automatically download credit card charges to your books. Or you might have a dedicated credit card transaction entry screen. What’s more, you might have to enter your credit card statement manually as a bill. Each line of the bill transaction represents a line item on your credit card statement. You can lump together multiple similar charges if your statement is particularly lengthy.

No matter how you get the transactions in your books, be sure to reconcile your credit card statement monthly, as discussed in Chapter 8.

RED FLAG

The IRS expects you to issue a Form 1099 to many of your vendors at the end of each calendar year and can penalize you for noncompliance. Right now you’re not required to issue 1099s to incorporated businesses, but Congress has contemplated making businesses issue 1099s to every vendor, not just those that operate as partnerships and sole proprietorships. It’s best to require all your vendors to give you a W-9, Request for Taxpayer Identification Number and Certification. Add the tax ID number to your vendor records, and specify in your software if the vendor should receive a 1099.

Purchasing Inventory

Take special precautions when purchasing inventory for your business.

You can pay for inventory a variety of ways—cash, check, online payment, or credit card. When recording inventory transactions, your software likely has a special Receive Inventory transaction screen. It’s important to use this window so you accurately receive the purchase of your inventory, which isn’t immediately an expense to your business but rather an asset purchase (more on this in Chapter 5). Your inventory reports will automatically reflect the new quantities on hand as well as the cost that you paid.

Don’t try to shortcut the data-entry process by entering a quantity of 1 and a lump sum amount. Take the time to enter the details of each individual inventory item. It’s possible that your accounting software can streamline part of this process for you if it offers a purchase order feature.

Purchase Orders

Purchase orders are a special type of accounting transaction that won’t directly affect your books. You don’t have to use purchase orders in your business, but there are several benefits to doing so if your accounting software offers the functionality.

A version of an Open Purchase Orders report enables you to track orders you’ve placed with vendors. This can be a useful cash-management tool that allows you to forecast upcoming cash flow requirements.

Purchase orders provide a means for tracking orders you’ve placed with vendors and suppliers.

As noted in Chapter 5, you can specify minimum order quantities for inventory items you keep in stock. Your accounting software might enable you to automatically generate purchase orders for items you need to order, which can help avoid unexpected inventory shortfalls.

Regardless of how you create a purchase order—by hand or automatically through your software—your inventory reports reflect the quantities you have on order. This is a vital inventory management tool that can help you avoid double- or triple-ordering products that have a long shipment time.

Keep in mind, though, you don’t need to enter a purchase order for every inventory item you buy. For instance, you might run down the street and write a check for items you purchase from a competitor or wholesaler. In such cases, when you enter the check in your books, you’ll be able to specify the inventory items you purchased as you write the check.

Purchase orders are best suited for situations when there’ll be a time delay between when you order and actually receive inventory items.

Processing Payroll

We devote a couple chapters later to setting up payroll and managing payroll taxes (see Chapters 12 and 18). The complexities and deadlines involved encourage many business owners to outsource payroll processing to third-party providers, but you certainly can use most accounting programs to process payroll in-house.

Cloud-based accounting programs often require a higher monthly subscription fee. Desktop-based programs often require an annual payroll service fee in addition to the cost of the software.

We give you an overview of setting up employees in Chapter 9. Once your employees are in the system, you’ll use transaction windows such as what’s shown in the following figure to enter the number of hours worked during the pay period for hourly employees, or to confirm the pay amount for salaried employees. You might have to fill out additional fields to record vacation time and/or reimbursements, which we discuss in Chapter 11.

Depending on the capabilities of your software and the associated level of service you purchase, you might be able to pay employees by direct deposit. This typically involves sending the payroll transactions 3 banking days in advance of when you want to have the amounts deposited in your employees’ accounts.

Accounting programs that offer payroll processing typically include a batch processing option that streamlines payday-related tasks.

You’ll also have the option to print paper checks. Although you can handwrite payroll checks, computer checks save you time and provides your employees a paystub that documents their earnings and withholdings both for a given pay period and the year to date.

Voiding Checks

Your accounting software offers a feature by which you can void a check, which reverses the effects of the original transaction. Your cash balance will go up by the amount of the check, and the other side of the transaction will be reversed.

You might be inclined to simply delete checks, but voiding leaves an easy-to-find audit trail in your books, particularly if you’ve printed or handwritten the check. As for the physical check, if you keep it in your paper records, write void in large block letters across the face of the check. Or destroy the check by shredding it or tearing it up. Just be sure it can’t be inadvertently cashed.

Exercise caution when voiding checks, as the transaction date you choose for voiding the check could impact your financial statements and, in turn, tax returns for a prior year. Checks should typically be voided as of today’s date, but some accounting programs won’t give you a choice and may backdate a void to a prior accounting period. In such cases, you might have to use adjusting journal entries (see Chapter 7) to mitigate the impact on your books so your prior period amounts aren’t affected. In short, you’d enter one journal entry as of the date of the void to reverse its impact on that date and then record a second journal entry as of today’s date to update your cash account and the corresponding offset or offsets.

If you choose to process your payroll in-house, be especially cautious when you void an unclaimed payroll check. Some accounting programs post the void in a prior year or quarter (based on the check date), which can cause payroll reports, W-2 forms, and payroll tax returns to differ from your books.

If a check gets lost in the mail or disappears somehow, you might want to issue a stop-payment order with your bank. This instructs your financial institution to refuse payment on the check should it turn up and someone tries to cash it. Your bank will charge a fee for this service, and the stop payment order will expire after a period of time.