Accounts Reconciliation Blog

When starting a small business it is easy to understand that you take in money for goods and that department is called accounts receivable. But many people wonder what are accounts payable?

Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks.

Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors. For example, the phone company, the gas company and the cable company are types of creditors. Each one of these creditors provide a service first and then bills the customer after the fact. The payable is  essentially a short-term IOU from a customer to the creditor. 

Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don’t pay their bills, they are considered to be in default.

Often in business you will have to purchase software, equipment or hardware. It can be questionable as to whether or not you should make this purchase at this time. If you have an accounts payable department they can run a calculation for payback of purchases. This will determine how long it will take to pay itself back in reduced costs or increased revenue. This information can be developed by simple payback analysis.

Simple payback period is determined by dividing the cost of a project or investment by the average annual improvement in cash flow. For example, an undertaking that costs $4,000 and generates $1,000 per year added to the bottom line will pay itself back in four years.

To address payback period, it is first necessary to gather information about the project’s cost, likely benefits and expected life. Costs are the easy part; it’s simple enough to learn the exact cost of a new piece of equipment, for example, and it’s not difficult to determine the costs of installation and operation. However, benefits and expected life can be another matter.

If you are self employed or a sole proprietor then you have to understand what business expenses and capital expenses are.

Business expense is the amount of money you have to pay to conduct your business. Usually they are common costs like rent for your business, traveling for your business and if you have any employees that you have to pay. These expenses are also tax deductible.

On the other hand capital expenses are related to the cost of purchasing things such as property or business related equipment. You cannot claim these as tax deductible but you can claim the depreciation, amortization or depletion.

It is not easy to determine if the expense is a capital expense or business expense. When dealing with the business tax deductions you might want to consider visiting the IRS website and check out the free tax training opportunities.

Setting up the bank account for your small business can be a very exciting thing to do. Often with self employed or sole proprietors they will use their small business banking and their personal banking as one account. They believe that by doing this they will reduce expenses and bank fees. But this can be a disastrous mistake. Here are some reasons why you should not combine small business and personal banking.

When it is time to do taxes you will have to separate business and personal expenses. It can be difficult with many mistakes figuring out which ones are business and which ones are personal.

It is important to have a clear trail of what income and deductions were used for the business. When you combine business and personal the trail is not clear. This can cause problem with the IRS.

It is very easy to make mistakes when you combine the personal and business bank account. If you were to miss a deduction then it can cause you to lose money.

It is important for businesses to keep up with the tax laws that affect the business. To be organized you should create a calendar of deadlines so that you don’t miss an important tax deadline. In the calendar you can include tax strategies just before the end of the year.

If you are using tax software, you can find some that integrate directly with business accounting software. Tax software will also help you to find small business tax deductions. If needed you can find help and publications at the IRS website. An accountant comes with the knowledge that you need to handle this.

Most people like to take a business trip. You get to travel, eat out on the business expense and stay in a decent hotel. Most business expenses have limits you have to be careful to know what the limits are. If you go over the limits then you have to pay the difference. Also for travel and entertainment expenses to be considered as deductions, they must be ordinary and necessary for your business. Most people have an accounts payable allowance outline.

A good rule is to document everything. Keeping an organizer that lists the dates of your trip along with an envelope for all receipts; this will ensure that no deductible expenses are missed. Consult a tax professional if you have any questions regarding the validity of an expense. If you can prove that business was conducted, the expense should stand.

Figuring out what to do about your small business accounting can be a hard task. If things like how to reconcile accounts payable or accounts receivable aging report sound like Greek then maybe you should be thinking about other options. There are many options: classes, coaching, software or outsourcing. If outsourcing sounds like something you would like to try here are some tips to pick the right one.

Check the type of security the business has setup to protect your information.
Always check the Better Business Bureau before you do business with a company on the internet.
Check if some companies offer free trials. This will give you the opportunity to evaluate the work done.

Payroll is one of the most difficult accounting functions for a small business. If your business is a sole proprietorship and you are the only one working in the business then you do not have to setup a formal payroll system. You can then pay yourself on a periodic schedule and are considered deductions for the business.

If you operate a partnership and you do not have employees then the same rule applies. You are liable for the individual income taxes. If you operate as a sole proprietorship and you have employees then you have to follow by the payroll rules. You are required to make payroll tax deposits, file various quarterly payroll tax returns and make additional end of the year reports.

Business debts are business liabilities. To find your current liabilities you have to follow these steps:

Get the correct figure from each of these.

Accounts payable statement

Taxes payable – this is the sales tax payable figure which comes from the Monthly Income Summary sheets and the payroll taxes payable which comes from the Check Register of our special payroll tax bank account.

Miscellaneous Current Liabilities – include any interest on credit card purchases, loans which have accrued but not paid, any amounts due on long term liabilities, payroll which has accrued but not paid, any principle due on short term notes.

Part of the accounting department is the accounts payable. Mostly the basic accounts payable procedures involve keeping track of money owed and paying bills. There are bills that are long term bills that will take one year or more to pay off. For those kind of bills you have fill out an accounts payable record. To make this record follow the instructions below.

In an excel sheet you need to have four columns. From the left name the columns Date, Due To, Terms, Amount. The date column is for the date that the debt was incurred. The due to column is for whom you owe the money to. The terms column is for any payment terms that may exist like due within 30, 60 or 90 days. The amount column is for the amount of money owed.

Then if you can fit 3 columns on the right name them this, Date, Paid To and Amount. The date column is for the date of a payments and all payments. The paid to column is for whom you made the payment to. The amount column is for the amounts of the payments.