I like accounting. That makes me weird I know, but I do. I am going to break down what I do and hopefully it will help someone. I will sprinkle in some accounting principles while I go. The first principle to understand is that there are more than one set of books. The IRS does not have the same rules that are useful for accounting purposes. I am not making this up. There is a lot of material out there about how to reconcile GAAP rules with IRS rules. I will also drop in some book keeping, which is a close cousin to accounting, but they are not the same thing. So let’s start.

To begin I am going to use Excel. I am surprised how far Excel has taken companies. When I was at Gateway Computers they were running into problems running a multi-billion dollar company on excel spreadsheets. But it is amazing that they were doing it at all. I will transition to QuickBooks which has its problems, but is a step up from Excel. Even though Quickbooks seems like a low end solution it is not, and it is certainly better than Excel.

I am also going to do things backwards by starting with the IRS requirements. Well here we go a bit deep for a second. You have a company. It means that you have registered with your state. If it is an LLC and there is only one owner then the IRS is going to treat you the same as an individual and you are going to file 1040 just like you would if you were employed you are going to add  a schedule C to account for your business income. If the LLC has more than one owner then you might be a partnership that would mean that at the end of the year you will file form 1065. That form is informational there aren’t any taxes associated with that. Part of that form is schedule K which reports the income the partners received and which they will report on their 1040 as income. Now you might have a real corporation. Unlike a partnership you will pay corporate taxes when you file form 1120. I am not going to go any deeper. You will pay taxes on income. There is no getting around it without lying. Since the single member LLC Schedule C addresses enough of the issues I am going to use that. There are tax advantages to doing that anyway.

Now I could spend a whole lot of time just talking just about the tax implications of just car expenses. Let me just say this. All expenses are deductible if they are ordinary and necessary part of the business. You know when you are fudging the truth. That lunch you bought yourself is not a normal part of your business. Keep in mind if it is a normal part of the business then you can deduct it as an expense. Let’s start with income. I have Point of Sale software that is required by the Franchise. It keeps track of a lot of information for me so no need for Excel yet.

I brought in $333k last year. Already I have some “fudginess” Don’t worry accounting is full of fudginess. People think it is straight forward math and everyone would get the same answer if they knew what they were doing. That is simply not true. You have to be comfortable with it. So my POS shows I made $875 more than what I am reporting here. The reason has to do with timing. When I get a check from UHaul I enter it in my POS. When I have earned the money I consider it income. The difference is 0.2% so another principle of accounting comes into play and that is materiality. If the amount is too small to make a difference then there is no reason to account for it at that level.

Phew that is a lot, but I want to try and cover a lot here.

Now (I am still on line 1) the other part that is not included is the un-reported cash sales. Some business owners use those sales to line their pockets. Un-reported cash sales escape taxes and franchise fees. I am not a fan of un-reported cash sales. The other day I traveled to a hospital to do a notary. I was given $80 in cash. I could have taken that money and not reported it. That is dishonest. Honesty is not just what can proven. However when I have a customer come in right before closing and that customer makes one copy and gives me a dime. I am most likely going to throw that in the drawer and not worry about it. If you claim you made $40K a year and you are driving a nice car and supporting a large family the IRS might suspect that you are not reporting all of your income. More important you will know. Be honest,

The second line up there is returns. I should have to report sales if a customer returns the item. You could have allowances for bad debt too. If you reasonably believe you are not going to get the money, then you can deduct it from your sales. I do not use this line. I do have occasional returns, but they are rare. When a customer returns an item I deduct it from sales for the day. Just my way of accounting for returns, not the only way. If you have a lot of returns you may want to track it to see if there is a pattern or for any other reason. With so few I do not separate it from the regular sales.

Next we have cost of goods. That is another section of the schedule C. I have a lot of say about that. I will go into that in the next post. At its basic level if an apple cost me $1 and I sold it for $5 then with my cost of goods being $1 my gross profit is $4. Now if I bought 10 apples for $1 each and again I sold 1 for $5 my cost of goods is still just $1. I still have 9 apples I can sell. My gross profit is the same $4.

My gross profit in 2015 was $204,755. Was I profitable? No way to tell from these numbers. I did leave out one line. Other income. We only bought and sold stuff. We could have got some money from investments or tax rebates or any number of things, but we did not have any of that going on. Just assume if money came into the business that was not borrowed it has to be accounted for here.