the top 15 things people do wrong

04/12/23 © www.TaxMama.com 2009

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Today’s Topic:

The Top 15 Things People Do Wrong in

Their Bookkeeping

Welcome to TaxMama’s Place Home of the


2Table of Contents

1. What is your entity?2. Understand the

Accounting Equation3. Don’t overlook your online

bank accounts – like PayPal

4. Credit Card payments are not a lump sum amount

5. Your contributions and loans to your business are not Income

6. Your draws from the business are not expenses

7. Should you be on payroll?

8. Your inventory purchases are not expenses

9. Recording asset purchases 10. Recording loan payments11. Why Auto expense detail is

important12. Not all insurance is deductible13. There is no such account as

Miscellaneous or Other14. Do not lump all your business

expenses together15. Split your hotel bills between

meals, entertainment and lodging


31. What is your entity?

Sole Proprietorship – just you and your wife Partnership – you and a partner – or your wife LLC – which means…you still need to decide C Corporation S Corporation Trust Exempt organization – non-profit


41.1 What Form will you File?

Schedule C - For Sole Proprietors Schedule E - Rental Properties and Royalties Schedule F - Farms and Ranches Form 1065 - Partnerships and joint ventures Form 1120 – C Corporations Form 1120S – S Corporations Form 1041 – Estates and Trusts Form 990 - Exempt Orgs Other …


52. Understand the Accounting Equation

Assets = Liabilities + Capital

Assets - all the things you own

Liabilities - all the things you owe

Capital - your equity in the business


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Paypal Google Checkout Amazon Marketplace account Etc.

3. online bank accountsand wallets


74. Credit Card payments are

not a lump sum amount

How do you record your credit payments on QuickBooks? Enter the check amount in the check register

and charge it to … Office Expense, or Travel, or Supplies, or…?

QuickBooks allows you to SPLIT check entries.

Do it with every credit card payment.


84.1 Splitting Checks


94.2 Paying Mixed Bills

• Credit card bills that include personal charges

• Checks written to one vendor for office supplies and inventory or capital assets

• Buying something that is used for both personal and business


105. Your contributions and

loans to your business are not Income

Look at your own Profit and Loss Statement – in Quicken or QuickBooks.

Under Income, see – Deposits from Owner (or similar term)? Loan from Owner

Notice how that increases your overall income – and your ‘taxable’ profits?

How should you enter them on your books?


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5.1 Booking Your Own Money

For Loans:In your deposit receipt, enter the deposit amount. The

account to record the loan is – LOAN FROM OWNER ( or officer, partner or…) And write up a loan document with interest rates etc. Have the business pay the interest!

For Contributions to the company:In your deposit receipt, enter the deposit amount. The

account to record the money is – Capital Contribution ( or stock purchase or…)


126. Draws are not expenses


Under Expenses, see – Owner Draws (or similar term)? Loan to Owner

Do you notice how that falsely reduces your overall income – and your ‘taxable’ profits – and often turns it into a loss?



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6.1 Booking your own Draws

For Loans from your business:In your check record, enter the loan amount. The account to

record the loan is – LOAN TO OWNER ( or officer, partner or…) And write up a loan document with interest rates etc. Pay the interest to your business!

For Draws from the company:In your check record, enter the draw amount. The account to

record the money is – Capital – Draws (name)Note: You may not take draws from a corporation or S

corporation. In a partnership, your draws may need to disclosed to the other

partners or equalized with their draws…or…


147. Should you be on payroll?

Speaking of draws….

When your business is a Corporation or S Corporation, if there is enough money for you to be getting ‘draws’, you should be on payroll.

Officers must take reasonable wages or compensation – with all the payroll tax trimmings.

Note: Sole proprietorships and partnerships may not pay owners or partners on payroll.


158. Your inventory purchases are not expenses


Under Expenses, see – Purchases (or some similar term)

Notice how that hugely decreases your overall income – and your ‘taxable’ profits?



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8.1 Entering Inventory

In your check record, enter the purchase amount. The account to record the money is an Asset Account – Inventory

At the end of each year, you need to take a count of your inventory and make a journal entry to reconcile your inventory to amount to the year-end balance.

Debit Purchases (Expense account)Credit Inventory (Asset account)

If you’re using QuickBooks’ Point of Sale system, you can enter the purchases into the specific inventory category. (Books – Nancy Drew – Hardcover, etc.) Handled properly, you should not need to make a journal

entry at the end of the year. Or a minor one for adjustments.


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9. Recording asset purchases


Under Expenses, see – Office Expenses Auto Expenses Supplies

Are the total expenses for any of these categories unreasonably high? You probably expensed an equipment purchase, or a down payment on a car or…



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9.1 Booking Assets

In your check record, enter the purchase amount. The account to record the money is a Fixed Asset Account – Equipment, or Office Equipment, or Vehicle, or…

Yes, you may be able to write the whole expense off in the year of purchase using IRC Section 179 depreciation.

At the end of each year (or each month), record depreciation

Debit Depreciation Expense (Expense account)

Credit Accumulated Depreciation (Fixed Asset account)


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10. Booking Loans

Often, people just book the payments, for instance, Dell $136.50 per month. That’s silly. This isn’t a lease!

You must enter the full price of the Asset purchased in your check register, using the SPLIT function. Split the entry as follows:

Debit Credit

Fixed Asset – Computer $1,000

Loan – Dell Computer -$1,000


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10.1 Booking Loan Payments

By definition, loans charge interest.

When booking a loan payment, split the check and record the interest and principal, as follows:

Enter payment amountin the check register$275.00Debit Credit

Loan – Dell Computer $200.Interest expense:Loans $ 25.

Either the statement provides the breakdown, or print out a loan amortization schedule for yourself at the beginning.

http://www.amortization-calc.com/


2111. Why Auto expense detail

is important

Remember Point 9 – about booking assets.

Auto expense detail often contains: Down payments Personal expenses – fuel, insurance, fuzzy dice The occasional surprise

Keep BOTH detail and mileage data.

At the end of the year, you might be able use whichever is higher. (or not…)

Certainly, for the year of purchase, you’ll want actual expenses, since the depreciation can be generous


2212. Not all insurance is deductible

Non-Deductible Insurance All life insurance on owners Premiums on all life insurance in excess of $50,000 on

employees or corporate officer/employees Health Insurance (on Schedule C) Certain health insurance on other entity returns (must have

written plan) Note: insurance on family members who do not work for

the business, or are not covered by spouse on Sec 125 plan

Personal portion of homeowners insurance, auto insurance NEVER deduct disability insurance premiums. That way

benefits are not taxable, when it’s time to collect.


2313. No Miscellaneous or Other

MAJOR RED FLAG!It’s common sense.

You see a large number on a return for an account called Miscellaneous or Other.

Wouldn’t YOU want to know what’s in there?

So does IRS.

Take everything out of those accounts and put them somewhere!


2414. Do not lump all your business expenses together

You probably don’t do this, but…

More common sense – The smaller you can make the total in most expense categories, the less likely it is to attract audit.

Break up expenses into more detail. For instance:Supplies could be: Office Supplies Marketing Supplies Technology supplies (toner, cables, etc.)

Certain expenses should be large – like advertising.


2515. Split hotel bills between meals, entertainment and lodging

Lodging, travel and transportation are fully deductible.

Meals and entertainment are reduced by 50%

When IRS sees big travel expenses and small meals numbers – they know the travel includes meals expenses.

Note: Remember, hotel room bills often have room service, or client entertainment costs (meetings – banquet service). Save the hotel printout and use the SPLIT feature in QuickBooks to enter the detail when entering credit card charges (or checks or cash payments).

Note 2: Tips – include them with the appropriate expense – bellhops and valet with Hotel; waiters and room service with meals, etc.


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Getting it Right!

You’ll be better able to compute your correct Estimated Tax Payments

And

You’ll save a fortune!

the top 15 things people do wrong

Business

business expenses

check record

asset account inventory

loan payments

inventory purchases

loan document

credit payments

s s corporations form