A break from the details

My plan for today was to continue with my explanation of bookkeeping entries but having had my hands in fiber most of the day with no thoughts of bookkeeping interfering the creative process I decided to take a little reprieve.  As I was creating I was wondering how much interest there really is in accounting 101.  If you are keeping good records and have contracted a bookkeeper to prepare your financial statements you don’t really need to know how to handle the daily accounting entries.  Then again, if you are familiar with these entries you will have a better understanding of your financial statements and a better understanding of your business and then be more prepared to make decisions down the road. 

I’m going to age myself here but when I started working on a computer it was DOS based.  Because I worked in DOS I understood what the computer was doing.  It was frightful for me to start working in a windows based environment.  Nothing made sense anymore.  I hated it but there was no turning back.  I’m now thankful that I have the DOS background because when something goes wrong I have a better idea about how to fix it. 

So, Accounting 101 it is, tomorrow…

A beginner’s intro to debits and credits

Balanced accounting is like a math equation, one side must equal the other, the debits have to equal the credits. All of your financial accounts (assets, liabilities, equity, income and expense) have a normal balance as either a debit or a credit. When you increase one account, another account has to be increased to keep everything in balance.

As a simple example let’s say you sold a print of one of your art pieces for $30 cash. Cash is an asset account (it’s what you own) and Sales is an income account. Asset accounts normally have a debit balance and Income accounts normally have a credit balance. To record this transaction you would debit (increase) cash and credit (increase) sales each for $30. The equal increase to both accounts keeps everything in balance. Sounds simple, right? It is, as long as you have a good chart of accounts, that you know what type of account you are increasing or decreasing and that you always keep everything equal.

Credit Cards

What About Credit Cards?

If you are just starting out as a business owner you might have begun thinking about the ways you accept payment for your art. We live in an age of plastic, even for a coffee and a muffin. Many people don’t carry cash or checks anymore so as a business owner it certainly makes sense to accept credit cards. A couple of other great reasons to accept credit cards are the convenience to both the buyer and seller and also for you to get the payment for your sale quickly deposited to your checking account. Yes, there is a percentage that you pay for processing but let's just say for example’s sake that you have a booth at an art fair and someone wants to make a purchase. If you can’t accept a credit card and the buyer doesn’t have checks or cash, you’ve lost the sale.

A question that often comes up is should I add a convenience fee to help offset my costs? When you are paying for a service or item how do you feel about paying extra when you want to use a card? I know I don’t like it and do my best to avoid knowingly paying extra. When you price your art a lot can go into your calculations and I won’t get into art pricing now but if you are including overhead costs in your price calculation the processing fees might just be included in your total.

Lastly, let’s say you accept credit cards, how do you record the transaction? What you don’t want to do is write in your cash receipts or sales journal the net amount of money from the sale. You should record the sale for the full sales price and then list the expense you incurred to process the card as an expense item. Cash received = Sale minus Fee. That’s the 2 sides of the accounting entry that you or your bookkeeper will make in recording your sale.

Record Keeping Part 3

What records should I keep?

Now that I’ve given you an overview of different ways to keep your records and why you should keep accurate records, here’s a brief synopses of what information to record.

Assets. This is the equipment you use for your business. Keep a record of what you purchased and when, how much you paid and how much you use them for your business. This information is necessary to calculate depreciation and the gain or loss when you dispose of the asset.

Income. Your income records would include sales related items such as invoices and contracts. Along with those, include copies of checks and your bank deposit slips. Other income items you want to keep are W-2 forms and 1099 forms.

Expenses. The detailed list of your expenses should include who you paid, what you purchased, the date, and the purpose of the expense. Be sure to keep all related sales receipts, bank card slips and canceled checks if you get them. If you travel for business you should also keep a detailed travel log that includes the date, destination, and mileage of each trip. Purchases of gas and car maintenance can be kept on this log also. If you qualify to take a tax deduction for the business use of your home you will need to keep all related expenses.

Copies of Tax Returns. Previous years’ tax returns are helpful when you are filing the current year return. The Schedule C, Profit or Loss from a Business, will provide the information you need to calculate self employment tax. When you are ready to retire, the amount you contributed will determine the benefits you receive. You’ll want a good record in case down the road there is a discrepancy about how much you earned during your working years.

It’s best that you have a separate bank account for all business related activity. Just like a check register, keep a cash receipts and disbursements’ journal. You will always know how much cash you have for your business and where the money went.

Record Keeping Part 2

How should I keep my records?

Even if you hire a bookkeeper or an accountant, the better you keep records of your income and expenses the easier it will be to understand what’s going on with your art business and this will save you money. Here’s a progression showing how I’ve encountered business records working as a bookkeeping consultant.

Shoe box. Wow, not just one year of receipts in a shoe box but this client wanted me to go back through the previous year and get all his expenses organized. Even if this is what you decide you will do, at the very least make a note on the receipt what the payment was for. When you hand over your shoe box to your bookkeeper at least he or she will be able to identify and categorize the expenses.

Keep a paper ledger. Every time you make a sale or a purchase write down the date, the amount, and what you sold or purchased. You can have columns set up for the various expense categories and then simply total the columns to know how much money you’ve made and what you are spending. Be sure to save all of your receipts!

Computer Spreadsheet. This is basically the same as the paper ledger but formulas will do the calculations for you and you can know at any time what your income and expenses are.

Bookkeeping Software. There are many different types of software available at just as many different prices. There are inexpensive household versions of accounting software that will track income and expenses but a little more sophisticated record keeping is worth the expense. You’ll be able to track inventory, print financial statements, and watch cash flow. You will save money at tax time when your tax accountant doesn’t have to plow through records to complete your tax return.

Keeping Good Records

Question: Why should I bother to keep records of income and expenses?

Whether you sell your art to make a profit or if you sell casually at a few art fairs or to friends you are responsible to claim the income on your tax return. You will be able to reduce the amount of taxes you owe if the IRS determines that you are operating as a business. It is only as a business that you can deduct the expenses of your art. This not only includes the purchases you make for producing your art but other expenses as well. Some of these include advertising, professional services, office expenses, art fair fees or even a home studio deduction if your studio qualifies. This can greatly reduce the amount you will owe in taxes. The IRS has certain factors they use to distinguish hobbyists from professionals who get this tax advantage. One of these is if you take a profit three out of five years, as determined by your schedule C. You’ll need these records at tax time, why not make it easier on yourself and keep them updated weekly or at least monthly depending on how much income and expense activity you have.

Of course, income tax benefits are certainly not the only reason you should keep well maintained records. Your records will be an indicator of what sells well or what makes a bigger profit. It’s documentation that you will need if you decide to get a bank loan. If you want to hire staff you’ll be able to determine if you can afford to. There are so many reasons to keep good records.