QuickBooks News

• New QuickBooks Premier: Healthcare Edition
• New QuickBooks Premier: Nonprofit Edition
• New QuickBooks Enterprise Solutions 3.0
• QuickBooks Online Edition
• New QuickBooks Point of Sale 2.0 for Retailers
• QuickBooks Premier 2003 Receives Editors’ Choice Award from PC Magazine

QuickBooks Features

• Sending a Business Form by E-mail (Online Billing)
• Online Banking

QuickBooks Common Questions

• Why is the Beginning Balance Incorrect in the Begin Reconciliation Window?
• How Does QuickBooks Match Online Banking Transactions to My Bank Register Entries?
• Why Does Marking a Transaction as Cleared in the Bank Register Not Change the Beginning Balance in the Reconcile Window?

QuickBooks Tips

• General Journal Entry
• General Journal Entry Window
• Creating a Journal Entry
• Printing General Journal Entries
• Tips for Creating Journal Entries Quickly
• Reversing a Journal Entry
• Viewing a List of Selected General Journal Entries

QuickBooks Product Updates

• QuickBooks Online Edition
• QuickBooks Point of Sale 2.0 New Features and Improvements

Accounting Matters

• Designing The Bookkeeping System
• The Basis of Accounting

Tax Matters

• Business Expenses
• Cost of Goods Sold
• Capital Expenses
• Personal vs. Business Expenses

New QuickBooks Premier: Nonprofit Edition
Intuit is scheduled to release a new QuickBooks Premier: Nonprofit Edition in May. The new Nonprofit Edition will have specialized features and reports for the nonprofit industry.

New QuickBooks Enterprise Solutions 3.0
Intuit is scheduled to release a new QuickBooks Enterprise Solutions 3.0 in May.

QuickBooks Online Edition
Intuit will enhance its Online Edition in an upcoming release on Sunday, May 4th. These improvements are designed to provide essential tools to help you protect the accuracy of your financial information.

For more detail on these new improvements, see QuickBooks Updates.

New QuickBooks Point of Sale 2.0 for Retailers
Intuit released its new QuickBooks Point of Sale 2.0 on April 24. Version 2.0 contains new features and improvements as follows:

• Track inventory assemblies (like kits or gift baskets)
• More ways to customize your reports
• Share data with Microsoft Excel
• More form designs for receipts and purchase orders
• Track layaways and customer sales orders
• Track petty cash expenses using the Paid Out feature
• Complete sample data file for better Practice Mode
• Customize user privileges to suit your needs
• Support for QuickBooks Approved tag printer and customer pole display

For more detail on these new features and improvements, see QuickBooks Updates.

QuickBooks Premier 2003 Receives Editors’ Choice Award from PC Magazine
In her March 11, 2003 article, Neaten Your Number Crunching, Kathy Yakal states “Intuit's QuickBooks has long been the leader in small-business accounting. The newest version, QuickBooks Premier 2003, is this year's standard setter. …Annual forecasts of your income and expenses, business plan creation, expert analysis, new additions to financial processing, and customization and integration with more than 100 business applications make Premier 2003 the most flexible package we've seen.”

Sending a Business Form by E-mail (Online Billing)
When you e-mail an invoice, statement, or estimate, your customer receives the form as a PDF file e-mail attachment along with a cover note. If you enable the form for online payment, your customer has the option of paying it online.

Note: You can create estimates only in QuickBooks Pro, Premier, and Enterprise Solutions editions.

To send an invoice or estimate

1. Display the invoice or estimate you want to send.
2. Click E-mail on the toolbar.
3. In the Edit E-mail Information window, check the e-mail addresses shown in the From and To fields.
   The From field should show your company's e-mail address. The To field should show your customer's e-mail address.
4. If other people should receive a copy of the invoice or estimate, enter their addresses in the Cc field. Use commas (,) to separate the addresses.
   
   Note: If you use the Deluxe Online Billing delivery tracking feature, keep in mind that the form will be marked "Viewed" if any recipient on the Cc list views it, including you.
   
5. If needed, customize the cover note so that it is appropriate for your customer.
   • Click anywhere in the note text and enter your changes.
6. If you want to give your customer the option to pay you online, make sure the "Allow online payment" checkbox is selected.
7. Click one of the following:
   • Send Now. To send the invoice, statement, or estimate immediately.
   • Send Later. To hold the invoice, statement, or estimate to be sent later, in a batch with other forms waiting to be sent.

What Do I Need to Get Started?

To e-mail forms from QuickBooks, you need:

• An Internet connection
  If you don't have a connection, contact an Internet service provider to help you get started and set up an Internet account. Then choose Internet Connection Setup from the Help menu in QuickBooks.
• An e-mail account
  QuickBooks sends your forms from an Intuit server, but your own e-mail address appears in the "From" field of messages so your customers can reply to you directly.
• QuickBooks Online Billing
  You must sign up for the Online Billing service to e-mail forms from QuickBooks. QuickBooks offers both a basic Online Billing service and Deluxe Online Billing, with more features for managing your billing and accounts receivable.

To receive payments online, you need:

• Online payment enabled
  Each time you send an invoice or statement by e-mail, make sure the "Allow online payment" checkbox is selected. The first time you select this option, you may need to complete additional signup steps.

Letting Your Customers Pay You Online
If you sign up for QuickBooks Online Billing, you can give your customers the option to pay you online from a Website whenever you send them invoices or statements by e-mail. This feature is available with both the basic Online Billing service and Deluxe Online Billing.

Keep in mind that your customers do not have to pay you online. They can print the forms you e-mail and send you a check instead, for example.

1. Sign up to receive online payment through QuickBooks Online Billing.
   You can sign up the first time you click the "Allow online payment" checkbox when e-mailing an invoice or statement.
2. Notify your customers that you are about to provide a new way for them to receive and pay invoices or statements.
3. Each time you send an invoice or statement by e-mail, make sure that the "Allow online payment" checkbox is selected.

   If you do not want a particular customer to pay you online, simply clear the checkbox.

How Does Online Payment Work?
When you e-mail an invoice or statement using QuickBooks Online Billing, you can choose to enable it for online payment.

Your customers can pay invoices and statements online by entering their credit card information on a Web page. Charges are processed through the QuickBooks Merchant Account Service. You will need to sign up for this service if you don't already have a QuickBooks merchant account.

Notes

• You can send a form at the time you create it, or you can mark it to be sent later in a batch with other forms.
• Keep in mind that your customers do not have to pay you online. They can print the form and mail you a check instead, for example.
• The reminder that you have payments to download appears under "Business Service Messages" in the Reminders list.

Notifying Your Customers About Online Billing
To make the transition smooth for your customers, contact them first to tell them about your plans. If you have many customers, you may want to do a mass mailing. If you have long-standing customers you know personally, you may want to contact them by phone.

Online Banking
Online Banking in QuickBooks gives you more than just day and night access to your accounts. It provides easy management of your business accounts and finances in QuickBooks.

Here’s How Online Banking Works:

Online Account Access and Download. Download transactions and account information from your financial institution. Go to the Online Banking Center, select "Get New QuickStatement" and click "Send." Once you've downloaded your transactions, simply match them to your records and easily reconcile your account.

Transfer funds online. You can transfer funds online between any two accounts at the same financial institution.

Make Online Payments. Write checks or pay bills as you normally would in QuickBooks. Select "Online Bank Payment" and choose the date when you'd like the payment to be delivered (allow up to 4 days to process). Then send your payments from the Online Banking Center within QuickBooks, and the payments will be made by the delivery date.

Finding Out More About Online Banking
The Online Banking service is offered by participating financial institutions through QuickBooks. Online banking requires access to the Internet either directly using a LAN or via an Internet service provider (ISP).

Getting Started with Online Banking
You need to perform three high-level tasks when you set up online banking.

1. Apply for service with your financial institution.
2. When you receive confirmation information and a PIN/password from your financial institution, enable your accounts. Verify that the information sent to you by the financial institution is correct.
3. Using the PIN/password sent to you by your financial institution, send your banking instructions, download your latest transactions, and view your QuickStatement.

   Transactions and instructions in QuickBooks will not be processed at your financial institution's processor until you go online and the processor records the transactions.

Applying for Online Banking Services
Apply separately to each financial institution where you want to use the online banking services.

1. From the Banking menu, choose Set Up Online Financial Services. Then choose Apply for Online Banking.
   
   QuickBooks displays the Apply Now section of the Online Banking Setup Interview.
   
2. Click Apply Now to connect to the Financial Institutions list on the Internet.
3. If you're looking for a particular service, select that service by clicking one of the choices in the Online Financial Services list. The list of financial institutions below will change to reflect the ones that provide the service you selected.
4. Select your financial institution.

   You'll be instructed either to apply by phone or on their Web site (where you'll receive additional instructions from your financial institution for completing your application).

Contacting or Getting Information About a Financial Institution
To use online banking services in QuickBooks, you must first find out if your financial institution supports them.

1. From the Banking menu, choose Set Up Online Financial Services and then choose Online Financial Institutions List.
   
   You'll connect to the Internet and see the Online Financial Institutions List.
   
2. Select your financial institution from the list displayed on the left side of the window.
   You'll see the contact information for the selected financial institution on the right.

• A transaction was cleared directly in the account register, causing the transaction to be excluded from the beginning balance in the Begin Reconciliation window. To include the transaction in the beginning balance, you must clear it in the Reconcile [Account] window.

  Note: Unlike QuickBooks 2001 and earlier versions, transactions cleared directly in the register are no longer used to calculate the beginning balance for reconciliation. If you are familiar with the way QuickBooks formerly calculated beginning (opening) balances, the amount may be different than expected.

• A previously cleared transaction was somehow modified since the last reconciliation. This includes:

• Voiding or deleting a cleared transaction.
• Changing the amount of a cleared transaction.

• There may be data damage in the company data file.

  If you are certain that the discrepancy is due only to transactions cleared in the account register, choose one of the following options:

• Complete the reconciliation with the beginning balance discrepancy:

  If you ignore the discrepancy in the Begin Reconciliation window and click Continue to proceed to the Reconcile [Account] window, any transactions cleared through the register will appear and will already have checkmarks next to them. Use your bank statement to select all other cleared transactions for the period. Assuming there are no other issues, the reconciliation should balance correctly.

• Complete the reconciliation of the transactions cleared in the register before reconciling to the bank statement:

  Because the sum of transactions cleared in the register is causing the variance between the QuickBooks and the bank statement beginning balances, if you complete the reconciliation of these items, you should then be able to reconcile properly to the bank statement.

  1. Enter the beginning balance from the bank statement in the Ending Balance field of the Begin Reconciliation window, and then click Continue to proceed to the Reconcile [Account] window.
  2. The transactions cleared in the register will already have checkmarks next to them, and the Difference amount in the lower right corner should be 0.00.
  3. Click Reconcile Now to finish reconciling these transactions only, and then begin the reconciliation process again. The QuickBooks beginning balance will now match the bank statement beginning balance.

  If you suspect that any transactions have been altered or deleted, choose one of the following options:

• Run a reconciliation detail report:

  With this report, you may be able to find transactions that have been changed or deleted since your last reconciliation.

  1. From the QuickBooks Reports menu, choose Banking, and then choose Reconciliation Detail.
  2. Select the appropriate account, and then click Display. Compare this report to reports printed for past reconciliations to look for differences.

• Locate the discrepancy amount:

  (This option will work only if the discrepancy was caused by a single transaction.)

  1. From the QuickBooks Edit menu, choose Advanced Find.
  2. Select Amount in the Filter list, select the equals (=) option, and then enter the discrepancy amount in the field to the right.
  3. Click Find. If a transaction is found, determine whether it is the transaction causing the discrepancy, and correct it as needed.

  Note: If the transaction was previously reconciled but is now uncleared, correct the status through the account register by clicking in the checkmark column, and then clicking Record to save the change. If the transaction has been marked cleared but has not been reconciled, see the solutions above regarding how to handle transactions cleared in a register.

• Run an account QuickReport:

  Use this report to determine if transactions have an incorrect cleared status.

  1. From the QuickBooks Lists menu, choose Chart of Accounts.
  2. Select the account you want to reconcile.
  3. Click the Reports button at the bottom of the list, and then choose QuickReport.
  4. Click Modify Report, and then click the Display tab.
  5. Select Clr in the Columns list.
  6. Click the Filters tab.
  7. In the Filter list, select Cleared.
  8. To the right of the Filter list, select either Yes (to filter for cleared transactions) or No (to filter for uncleared transactions), and then click OK to return to the report.
  9. Look at recent transactions. If you see transactions incorrectly cleared or uncleared, update them in the account register by clicking in the checkmark column, and then clicking Record to save the change. (See the solutions above regarding how to handle transactions cleared in a register.)

• Run an audit trail report:

  This report can help identify transactions that have been deleted, changed, or added since the last reconciliation. A close examination of this report can often help locate a problem, however, if the audit trail feature has not been active, you will not be able to see changes or deletions that occurred while the audit trail was inactive.

  1. To activate the audit trail feature:
     • From the QuickBooks Edit menu, choose Preferences.
     • Click the Accounting icon on the left.
     • Click the Company Preferences tab.
     • Select the Use audit trail option, and then click OK.
  2. To run the report, from the QuickBooks Reports menu, choose Accountant & Taxes, and then choose Audit Trail. You may need to adjust the report dates to see modifications for the appropriate time period.

  If the options listed above do not resolve the issue and you suspect damage, use the QuickBooks Verify Data and Rebuild Data utilities to detect and repair the damage.

How Does QuickBooks Match Online Banking Transactions to My Bank Register Entries?

When you download transactions from your financial institution, and select the Show Register checkbox while viewing a QuickStatement (a list of transactions that have taken place since your last download, and any transactions not matched from previous downloads), QuickBooks tries to match transactions from the statement with those in your register. The matching process consists of several stages:

Before the matching process:
Prior to beginning the matching process, QuickBooks identifies all register transactions dated more than 90 days prior to the system date of the computer on which QuickBooks is installed, or more than 60 days prior to the earliest date of all the downloaded transactions. These identified register transactions will not be considered for matching. Transactions that have already been reconciled are also discarded from matching consideration.

Primary matching process:

1. The downloaded transaction amount is compared to the amount of the first remaining register transaction ("remaining" refers to those items left after the criteria applied in "Before the matching process"). If the amounts are not identical, the pair does not constitute a match, and the next register transaction is compared to the downloaded transaction.
2. If the transaction amounts match, the check numbers are compared. If these numbers also match, the transaction is marked as matched. If the check numbers do not match, the next register transaction is compared:
   • Only check numbers with numerals are considered as final match candidates in the primary matching process. If the check number in the register contains letters and the downloaded transaction has no check number, the pair is considered a possible match and it moves to the secondary matching process (see below).
   • If the downloaded transaction is from a financial institution using the OFX protocol (one of the online banking protocols QuickBooks uses) and does not contain a check number, and the register transaction is an online payment with a check number, the pair is considered a possible match and it moves to the secondary matching process (see below).
   • If there is no check number for either transaction, the pair is considered a possible match and it moves to the secondary matching process.

Secondary matching process:

1. Next, the dates of the two transactions that are considered a possible match are compared. If the register transaction is dated more than 30 days prior to the downloaded transaction, no match is made. The process returns to primary matching and compares the downloaded transaction with the next register transaction.
2. If the dates match, the payees of the two transactions are compared. QuickBooks takes both transactions and removes any numbers, the following special characters:

   ! @ # $ % ^ ( ) / \

   the period character, and the space character, as well as any characters following the numbers or special characters. For example, Chevron Oil #456 Newark becomes ChevronOil. Only as many characters as are left in the modified register payee name are compared with the downloaded payee.

   Therefore, a register payee of ChevronOil (10 characters) will match a downloaded payee of ChevronOilStation, because the latter's first 10 characters match ChevronOil. If the payees match, then the transaction is considered a match. If they do not match, the process proceeds to the supplementary matching process.

Supplementary matching process:

QuickBooks compares the register transaction examined during the secondary matching process against each unmatched transaction in the QuickStatement. If it finds a better pair than was found during the secondary matching process, then it uses the new match instead. Otherwise, QuickBooks creates a match between the current register transaction and the downloaded transaction compared during the secondary matching process.

Why Does Marking a Transaction as Cleared in the Bank Register Not Change the Beginning Balance in the Reconcile Window?

A transaction may have been cleared directly in the account register rather than through the Reconcile window. Transactions cleared directly in the register are not included when calculating the reconciliation beginning balance (known as the opening balance in previous versions of QuickBooks).

In previous versions, clearing transactions directly in the register affected the reconciliation opening balance (now called beginning balance in current QuickBooks versions). In current versions, clearing or unclearing transactions in the register does not affect the reconciliation beginning balance. Also, when the cleared status is assigned in the register instead of in the Reconcile window, there is no difference between assigning a checkmark or an asterisk.

This is a change in functionality from previous versions.

QuickBooks has a General Journal Entry window that you can use for special transactions (such as selling a depreciated asset) or for all transactions if you prefer the traditional system.

Also, when you enter a transaction directly into an asset, liability, or equity account register, QuickBooks automatically labels the transaction “GENJRNL” in the register and “General Journal” in the reports that list transactions.

General Journal Entry Window
The General Journal Entry window is for accountants or people who prefer the traditional system of accounting by entering transactions in a general journal. If you are unfamiliar with how a general journal works, you do not need to use this form.

Typically accountants make general journal entries when working with an accountant's review copy.

If you are not an accountant, you might use the general journal to transfer amounts from one income or expense account to another, or from one class to another.

Creating a Journal Entry
To create a journal entry, follow these steps:

1. From the Banking menu, choose Make Journal Entry.
2. Change the date if you wish.
3. Fill in the entry number.
4. In the detail area, enter distribution lines.
5. Save the journal entry.

Printing General Journal Entries
Print a general journal entry if you want a hard copy for your records or to give to your accountant.

1. From the Banking menu, choose Make Journal Entry.
2. Fill in the form, or click Previous or Next on the toolbar to display the entry you want to print.
3. Click Print on the General Journal Entry toolbar.
4. In the Print Reports window, check that all of the information is correct.
5. Click Print.

Tips for Creating Journal Entries Quickly
If you create many journal entries, here are two tips for creating them quickly:

Turn on auto-numbering
Normally, QuickBooks numbers journal entries automatically. If this feature happens to be turned off, here's how to turn it on.

1. From the Edit menu, choose Preferences.
2. Select Accounting.
3. On the Company tab, select the "Automatically assign general journal entry number" checkbox.

Fill in memos automatically

• When you create an entry, select the "Autofill memo" checkbox. This is useful when you have many lines to enter and you want the same memo to appear on each line.

Reversing a Journal Entry
The following feature is available only in the Premier and Enterprise Solutions editions.

If you need to, you can reverse any journal entry. Reversing an entry creates a new entry, dated the first day of the next month, which reverses the debit and credit amounts. Account assignments are not affected.

1. Display the journal entry.
2. Click Reverse.
3. If you have changed the entry since you last saved it, click Yes to confirm that you want to save your changes.

Viewing a List of Selected General Journal Entries
The following feature is available only in the Premier Accountant and Enterprise Solutions editions.

If you wish, you can view a list of selected general journal entries in the General Journal Entry window. By default, the list displays all general journal entries added in the last month.

To select a different set of entries
Click the List of Selected General Journal Entries drop-down list and choose a date range. All entries added during that time display in descending order by date. Only the first line of each entry is shown.

To select a single general journal entry
Click the entry in the list. It is displayed above and can be viewed in more detail, edited, and so on.

To close the list of selected general journal entries
Click Hide List of Entries.

QuickBooks Online Edition
The following enhancements will take effect mid-day on Saturday May 3, 2003 and the new features will appear automatically when you log in on Sunday, May 4th:

• Closing the Books
  The Closing the Books feature will allow you to restrict access to data in prior accounting periods. First you will be able to set a closing date and, optionally, a password. Then if anyone tries to change a transaction dated prior to the closing date, the user will see a warning and must enter the password if you set one. You will also be able to run an Exceptions to Closing Date report for information about all transactions that were changed after the books were closed.
• Audit Trail
  QuickBooks Online Edition will maintain an audit trail of each transaction as it is added, changed, or deleted. This lets you see who made the changes and exactly what changes were made.
• Enhanced Activity Log
  You will be able to filter the Activity Log to make it easier to find the information you're looking for. For example, you will be able to limit it to show only login activity, or only changes to recurring templates.

QuickBooks Point of Sale 2.0 New Features and Improvements
New - Track Inventory Assemblies
Manage your inventory more accurately by using the assembly feature to track items sold as a group, such as kits and gift baskets.

Improved - More Ways to Customize Your Reports
Easily view your best-and worst-selling items, daily sales summaries, inventory and purchase order status, and more. You can stay on top of your business without the manual work you used to have to do. And with flexible reporting, you can tailor reports to meet your specific business needs.

• Inventory reports. Analyze what’s sold and what’s in stock. View your inventory, both on-hand and on-order.
• Best and worst seller report. See which items are selling and which aren’t.
• Daily sales summary reports. Summarize daily sales activities (total sales, returns and taxes) to help reconcile your cash drawer without sorting through stacks of register tapes.
• Sales history reports. Generate sales reports summarized by period, department or vendor. View sales by employee.
• Customer promotion lists. Create and sort customer lists by name or ZIP code to promote special events or make special offers to specific customers.

New – Share Data with Microsoft Excel
Save time and reduce errors by importing customer, vendor and inventory data right from Excel, instead of entering it by hand. You can also export report data to Excel in one simple step, so it’s easy to include sales data with your other business reporting and tracking practices.

New - Track Layaways and Customer Special Orders
Now it’s easy to keep track of customer special orders and layaways, so you can let your customers pay over time for high-ticket items and stay on top of special orders and back orders.

New - Track Petty Cash Expenses Using the “Paid Out” Feature
Use QuickBooks Point of Sale to record cash paid out from your cash drawer for occasional expenses.

Improved - Customize User Privileges to Suit Your Needs
Protect your company data by restricting employee access to only the data they need. Set individual permissions to control who can see reports, change prices, process returns or perform other key tasks. You can require employees to log in before ringing up sales, so you’ll have a record of every transaction by every employee.

Accordingly, a bookkeeping system should be designed for each entity. It should not be overly complex and should consider (a) the types of transactions the business enters into and how information about those transactions can be captured and (b) the type of financial information the business needs to efficiently manage its operations. The following paragraphs discuss designing a system that considers those issues.

Understanding the Business and Industry
Before designing a bookkeeping system, accountants need to understand the business and industry. Accountants should consider unusual or significant industry or business characteristics. For example, accountants would need to determine whether a construction company accounts for its contracts under the completed-contract or percentage-of-completion method of accounting.

Keep the System Simple
A bookkeeping system should be simple. Unnecessarily complex systems are inefficient. For most entities, an elaborate record keeping system is not required.

Capturing Information About Transactions
Obviously, the financial information generated by a system that fails to record some or all of a business’s transactions is of little use. Similarly, the financial information has little value if the system captures all transactions but fails to record them accurately.

Therefore, the bookkeeping system should provide controls to ensure that it captures and accurately records information about all of the company’s transactions. The following system is recommended. Since each entity’s needs vary, however, it may require adapting to the unique needs of a particular business.

Cash Disbursements
Checks should only be signed by authorized personnel. Restricting the number of personnel authorized to sign checks creates an important control over cash disbursements. In addition, two employees should be required to sign checks that exceed a specified dollar amount. Before signing a check, the authorized employee should determine that:

1. The supporting invoice is attached to the check.
2. A payment explanation (for example, a statement number, invoice number, or account number) is included on the check.
3. An adequate description has been entered in the check register or on the check stub.

After signing the check, the employee should initial and date the invoice and return it for filing. The following are three common methods of filing paid invoices:

By Check Number. This method is most useful if a small number of checks are written. Paid invoices are filed in numerical sequence in one file with the check number of the check that paid the invoice controlling the filing sequence. The primary advantage of this system is its simplicity. Its main disadvantage is the difficulty in finding a paid invoice unless the check number is known.

Alphabetically. This method is most useful if the number of checks written is small, but frequent reference to paid invoices is desirable. Paid invoices are filed alphabetically by vendor in a file for each letter of the alphabet. This system retains a level of simplicity but allows convenient access to paid invoices.

By Vendor. This system is most useful if the number of checks written is large. Paid invoices are filed in separate files for each vendor. The main advantage to this system is the convenience of locating specific paid invoices. Its main disadvantage is the additional filing time required.

If completed properly, the procedures discussed in the preceding paragraphs will create an adequate level of control over disbursements and, in most cases, will provide enough information for accountants to record the disbursements accurately.

Unpaid Invoices
For many small to medium-sized businesses, a simple unpaid invoice file provides adequate control over unpaid invoices. Under such a system, each vendor invoice is approved when it is received and then placed in a “tickler” file according to the date that it should be paid. Periodically, the unpaid invoice file is reviewed by an authorized employee. Invoices that are due are removed, a check is prepared, and the invoice and check are forwarded to the employee authorized to sign checks.

Using such a system centralizes control over unpaid invoices. As a result, it is not necessary to search through several files to predict when cash payments will be required. In addition, management can readily determine the balance of unpaid invoices at a particular point in time by totaling the invoices in the unpaid invoice file.

Cash Receipts
The system for recording cash receipts will vary depending on the type of business. For example, the cash receipt system of a retail business that primarily makes cash sales could be designed to capture information about sales as well as cash receipts. The cash receipt system of a company that only makes sales on account, however, would, in most cases, only capture information about the collection of accounts receivable.

Regardless of the type of business, the primary objective of a cash receipt system is to ensure that all collections are deposited and properly recorded. That can be accomplished by performing the following steps:

1. Identify and Summarize Cash Collections. For some companies, that will involve totaling cash register tapes or prenumbered sales receipts. In other companies, the summary may be in the form of a worksheet that lists each cash receipt and its purpose. The summary should be forwarded to the accountant so that they can (a) properly record sales and collections of cash and accounts receivable and (b) compare the summary to bank deposits to determine that all cash received was deposited.
2. Deposit Cash Receipts Promptly. Checks should be restrictively endorsed as they are received so that they may be deposited only in the company’s bank account. Then, at the end of the day (or several times during the day if volume is sufficient), cash receipts should be deposited and the validated deposit slip attached to the cash summary.

What Information Should the System Provide?
The most important aspect of a bookkeeping system is that it produces a general ledger that contains financial information that management can use. At a minimum, the system must provide the information necessary to prepare tax returns. Depending on the company, the system may also need to produce information for balance sheets, income statements, statements of cash flows, and supplementary information. Therefore, how the financial information will be used should be considered when designing a bookkeeping system.

Developing a Chart of Accounts
It is not necessary to use a chart of accounts that provides for every conceivable transaction. Instead, the chart of accounts should include the minimum number of accounts necessary to capture the appropriate financial information and be flexible enough to allow for future growth. Accountants should design the chart of accounts to include the accounts necessary for financial and income tax reporting. For example, for income tax reporting, a company may require two accounts for business meals and entertainment—one to record the expenses that are fully deductible and another to record the expenses that are only partially deductible.

A chart of accounts usually begins with accounts that are used to prepare the balance sheet and continues through the accounts that are used to prepare the income statement. For example, the following series of account numbers may be used:

The number of specific accounts within each category depends on the entity’s needs.

The Basis of Accounting
The basis of accounting determines how accounting transactions are recorded. For example, recording transactions based solely on cash receipts and disbursements (that is, cash in/cash out) is considered the cash basis of accounting. Some of the more common bases of accounting are explained in the following paragraphs.

Selecting the most appropriate basis of accounting is important from a cost-effective standpoint since it reduces the effort required to prepare financial statements and tax returns. Three of the more important considerations in choosing the basis of accounting are:

Keeping the Number of Adjusting Journal Entries at a Minimum. Preparing adjusting journal entries takes additional time. If the basis of accounting selected requires a significant number of monthly adjusting journal entries (for example, to convert general ledger information from the GAAP basis of accounting to the tax basis for tax reporting and to another basis for financial reporting), it becomes more difficult to provide bookkeeping services efficiently.

Providing Businesses with Useful Information. You need financial information to assist you in making business decisions. You should carefully consider the business's financial needs before selecting a basis of accounting. For example, certain not-for-profit organizations must closely monitor cash receipts and disbursements. Consequently, cash basis financial statements may be more useful to them than accrual basis statements.

Can the Same Basis of Accounting Be Used for Both Tax and Financial Reporting? Generally, small to medium-sized businesses can use the same basis of accounting for the general ledger and for tax and financial reporting, particularly if the basic financial statements are supplemented with schedules that provide information on significant accrual basis items (such as accounts receivable). If the same basis of accounting is used, few, if any, adjustments will be necessary to prepare financial statements and tax returns from general ledger information.

The following paragraphs discuss bases of accounting that are commonly used and considerations for selecting each.

Accrual Basis of Accounting
The method of accounting in which assets, liabilities, revenues, and expenses are recorded in the same period that the related transactions occur, regardless of whether cash was received or paid by the entity during the period, is referred to as the accrual (or GAAP) basis of accounting. The accrual basis of accounting is based on cash transactions as well as credit transactions. For example, under the accrual basis of accounting, a company that buys inventory in 20X1 but does not pay for it until 20X2 would record the purchase in 20X1 (when the transaction occurred). The accrual basis of accounting is the basis prescribed by generally accepted accounting principles.

Cash Basis of Accounting
The cash basis of accounting is a method of accounting in which transactions are recorded only when cash is collected or paid. For example, under the cash basis of accounting, a company that sells a product in 20X1 but collects the cash proceeds from the sale in 20X2 would record the sale in 20X2 (when the cash proceeds were collected).

Income Tax Basis of Accounting
The income tax basis of accounting is the method of accounting that an entity uses, or expects to use, to file its income tax return. It is essentially the cash basis of accounting modified so that fixed assets are capitalized and recognized as assets, depreciation is recorded over the estimated useful lives of assets, and certain expenses are recorded on the accrual basis of accounting (for example, qualified retirement plan contributions and unremitted payroll taxes).

It is important to separate business expenses from:

• Expenses used to compute the cost of goods sold,
• Capital expenses, and
• Personal expenses.

There are expenses that may change every year such as:

• Standard mileage rate,
• Standard meal allowance,
• Health insurance deduction for self-employed,
• The per diem rates for travel (domestic),
• The per diem rates for travel (foreign), and
• For tax years beginning after 1999, percentage depletion on the marginal production of oil or natural gas is limited to taxable income from the property computed without the depletion deduction. Refer to Chapter 13 of Publication 535, Business Expenses.

Types of expenses that may be deducted:

• Accounting/bookkeeping Expense
• Advertising
• Amortization
• Business Bad Debts
• Business Gifts
• Business Interest
• Car & Truck Expenses
• Casualty Losses
• Commissions
• Contributions
• Depreciation of Business Property
• Dues & Subscriptions to Professional Publications
• Educational Expense
• Employee Pension/Retirement Plans (IRA)
  • Individual Retirement Arrangement (IRA)
  • Qualified Plan (Keogh Plan)
  • SIMPLE Retirement Plan
  • Simplified Employee Pension (SEP)
• Entertainment
• Excise Taxes
• Legal Fees
• Licenses
• Patents/Copyrights/Agreements not to Compete
• Promotional Materials (not considered business gifts)
• Rent
• Repairs & Maintenance
• Start-up Costs
• Supplies & Materials
• Tax Preparation Fee
• Taxes
• Travel & Entertainment
• Utilities

Cost of Goods Sold
If your business manufactures products or purchases them for resale, some of your expenses are for the products you sell. You use these expenses to compute the cost of the goods you sold during the year, as shown below.

You deduct these costs from your gross receipts to compute your gross profit for the year.

You must maintain inventories to be able to determine your cost of goods sold. If you use an expense to compute cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into computing cost of goods sold:

• The cost of products or raw materials in your inventory, including the cost of having them shipped to you.
• The cost of storing the products you sell.
• Direct labor costs (including contributions to pension or annuity plans) for workers who produce the products.
• Depreciation on machinery used to produce the products.
• Factory overhead expenses.

Under the uniform capitalization rules, as explained under Inventories in Publication 538, Accounting Periods and Methods, you may have to include certain indirect costs of production and resale in your cost of goods sold. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. This rule does not apply to some small businesses.

Capital Expenses
You must capitalize, rather than deduct, some expenses. These are typically significant costs, such as for buildings, vehicles, and equipment. Although you generally cannot take a current deduction for a capital expense, you may be able to take deductions for the amount you spent through a method of depreciation, amortization, or depletion. These methods allow you to deduct part of your cost each year over a number of years. In this way you are able to "recover" your capital expense.

Personal vs. Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct as a business expense only the business part that meets the general business deduction rules of being an ordinary and necessary business expense.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, generally you can deduct as a business expense only 70% of the interest you pay on the loan. The remaining 30% is personal interest that is not deductible.