The following is a guest post by Caroline Devoy
{photo by mistamoni. This doesn't have to be you!}
Okay, so tax season is over for 2008. If you haven't thought about it
already, it's time to decide the best way to keep your accounting house
in order so you don't experience the same panic that you did, oh, say
yesterday?
Let me preface this by saying I am the world's worst at keeping up with my accounting duties. So, any hint of a lecture is directed at me more than you. Accounting doesn't earn you any revenue and detracts from what you really want to be working on, but it is necessary. So how do you record these details with enough regularity that you don't forget them, but not abandon all revenue-generating activities?
First, I recommend any type of computerized accounting, because you have a backup (tell me you do, yes?) of the data on the computer, you can generate multiple reports without a calculator, and it's easy to generate any information that your tax-preparer/accountant requires.
Also, computerized accounting often provides accounting advice or help in how things should be entered. For example, when you write a check, the software often provides a screen that looks like a check, deducts the money from cash and allows you to categorize what expense the check belongs to. That said, you may not need to physically enter your transactions into the accounting system until you accumulate enough receipts and other information on paper.
To simplify things, I'm going to divide you into two groups: the graphic designers (GD's) and the Etsy Sellers (ES's). The graphic designers sell their time, usually don't have a lot of expenses and bill weekly at most. Etsy sellers sell product, possibly several times day, are constantly buying supplies to sell or to make their product, hold inventory and bill daily. Those are pretty much the two extremes of accounting (for purposes of this post) and they really do require different approaches. Ultimately, I think both should use a computer solution, but how you get it there and how often you sit down and update it are a different story.
GD's
Frequency:
Common Accounting Activities:
- Invoicing/Billing
- Recording payments from clients
- Writing checks for expenses and recording expenses from Paypal and credit card statements.
Advantages of Available Software:
Issues with Available Software:
How to handle collecting & entering data:
Make sure your documentation or notes include a date, the amount of the transaction and who it was to or from and what it was for. At the end of each quarter, don't forget to print out your bank statements, credit card statements and Paypal transactions to catch any items that might not already be in the folder. Then when you sit down quarterly to enter the transactions, you can just put a distinguishing mark on each document to indicate that you entered it in the computer.
At the end of the year, you can gather up your accounting system data and your quarterly file folders and deliver them to your tax-preparer.
ES's
Frequency:
Monthly accounting might be sufficient. If you are an Etsy rock star, weekly might be more appropriate.
Common Accounting Activities:
- Entering invoices. The invoices will usually be generated by Etsy or other online store, so you'll just want to enter weekly or monthly totals, depending on your accounting schedule.
- Writing checks for expenses and recording expenses from Paypal and credit card expenses.
- Tracking inventory and cost of goods sold (Note 1).
Advantages of Available Software:
Issues with Available Software:
Please be aware if you want this level of inventory tracking and you are generating invoices outside of the system (Etsy or other venue), you will have to enter enough information into the system to know what you sold.
Tracking inventory gets more complicated if you turn that fabric into a purse. Your inventory contains items such as fabric, buttons, interfacing and you are invoicing for a purse. It takes a more sophisticated (and expensive) accounting program to relate those two things. I'll give you a workaround to handle this problem below.
How to handle collecting & entering data:
Sales
Most sales venues will provide you with reports of your sales,
so I would use those reports to enter the sales for the period in
summary. Don't get bogged down entering every single individual
transaction. Your store reports will let you know who bought what (and
certainly save those reports in your folder) but your accounting system
doesn't need that information and it takes too much time to re-enter. And again, if you sell in multiple venues, set a customer for each one
and you can tie the sales figures for that "customer" back to your
reports.
Expenses
Keep your receipts for non-inventory costs (postage, cell
phone) in this folder and enter them when you do your accounting
entries for the period. Mark the receipts with some mark that lets you
know that you entered them into the accounting system.
Inventory
This is a bit tricky, but I have a plan. As you make
purchases of supplies, place the receipts in your inventory file
folder. At the end of the month (or whatever accounting cycle you have
created), I would enter each receipt and classify it as Inventory. (Inventory is just another account code just like postage, phone, and
the like, just labeled Inventory. However, when you set up the
account, you should label it as a Current Asset, not an Expense.)
If you sell individual items (such as fabric) you can estimate the dollar amount of fabric remaining in inventory. (For example, you could determine how many yards are remaining and multiply by an average yardage cost.) Then you can adjust Inventory to that number. Your adjustment would be the number you get from subtracting the estimated inventory number from the current balance shown in the accounting system for Inventory. (For example, current balance in accounting system says Inventory is $5,000. You estimate that you have $2,000 remaining. $5,000 - $2,000 = $3,000 adjustment that needs to be made.)
Most accounting systems let you make a "journal entry", though the option may be buried somewhere obscure. (In Quickbooks it is under the menu option Company-> For Your Accountant -> Make General Journal Entries) Your journal entry will be a debit (dr) to Cost of Goods Sold and a credit (cr) to Inventory in the amount of the adjustment. Below is a screenshot of what this entry would look like in Quickbooks Simple Start.
{click pic for larger view}
Of course, the remaining inventory and adjustment number gets trickier when you are making items for sale because you are usually working with several different items and it can be harder to estimate what is left. But the methodology is the same. Determine what materials are left and their value. Also, if you have any finished product in inventory, estimate a cost for those items as well.
If you use this "off-line" method for tracking inventory, you can then use the inexpensive or free accounting systems. The only downside is you are working with estimates. But, truthfully, it is very difficult when you are manufacturing to keep inventory exact. Just watch your inventory number for reasonableness. For example, it can't be less than zero. If it is, you will need to adjust it back up, which reduces your expenses (COGS). At the end of the year, I would make sure I had a spreadsheet detailing out what I included in inventory and the total value (that will match what is in your accounting system) for tax purposes.
Mobility for All
Unfortunately, the accounting world hasn't quite caught up with mobile apps, but I'm waiting for the day you can enter the deposit you make at the bank on your IPhone and have it post to your accounting system. Or your supplies purchase can be entered as you are standing in line to pay. It would certainly keep transactions from getting lost or forgotten. There are some IPhone apps that allow you to enter expenses, but they don't connect back to a larger accounting system and there is no way to print them out. (And I'm not going to give my IPhone to my tax-preparer for three weeks so he or she can get the data!) But I would be surprised if Quickbooks and other accounting apps didn't add a mobile component in the next year or so. Until then, that crumpled piece of paper in your purse is the next best thing!
This is huge topic that I've condensed down to a few paragraphs, but I'll end with two bits of wisdom.
1. Set up whatever method works for you that you will follow. You can have the most detailed, well-thought out system in the world, but if you don't ever update it, it is useless.
2. Don't be afraid to summarize. You don't score any brownie points for entering every single little thing. Just make sure the detail is available somewhere (like in those file folders) and enter totals.
Note 1: Here's a quick explanation of Inventory and Cost of Goods Sold. Inventory is items you are holding for resale that have not yet sold. Standard accounting practice and most importantly, the IRS, says you can't deduct those items until sold. Once the items are sold they become Cost of Goods Sold or COGS. In a very simple world, here is how you can compute it- total up all the money you spent on purchasing and making product for the period (Number A). Then, count how many items you have not sold (your inventory) and multiple it per your per unit cost (Number B). Number B is the value of your inventory. Subtract B from A and you get Cost of Goods Sold, or COGS. That is the amount you get to deduct for the period.
Caroline Devoy graduated with a B.S. in Accountancy some time in the 20th century. She worked as a CPA until
the public accounting firm found her serious demeanor to be a problem
in their fun-filled environment. In pursuit of further initials, she
got her M.B.A. in Entrepreneurism and in her spare time, she runs jcaroline creative!, a website retailing
fabric, ribbon, notions and a questionable hedge fund. Just kidding,
we don't sell notions.
