intro to accounting with quickbooks for startups, software development companies, and small...
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Check out Yair Flicker's intro to accounting. Perfect for startups and software development companies.TRANSCRIPT
Intro to AccountingFor startups and small businessYair Flicker, Betamore, 3/19/13http://smartlogicsolutions.com
What We’ll Cover
• Legal decisions to make—and related tax consequences
• Accrual vs. Cash
• Fundamental Accounting Reports
• Principles of Accounting
• Setting up a QuickBooks file
My Experience
• SmartLogic Solutions—2005 to present
• Maryland Nonstock LLC / s-corp
• Bikemore—2012 to present
• Maryland Nonstock Nonprofit Corp
• TeamPassword—2013 to present
• Maryland Stock Corp / s-corp
My Experience
• Took Intro to Accounting 10 years ago
• Mostly self-taught or gleaned from my accountants
• NOT a tax professional
My Credentials• Me with a yarmulke at the Western Wall
About the Accounting Industry
• Not the most progressive
• Doesn’t change a whole lot
• QuickBooks is the canonical tool for small operations
• But accountants do know accounting really well
Who’s in the Room?
• Your Name
• Company Name(s)
• Stock / Nonstock?
• S/C-Corp, Partnership, Sole Proprietor
• Payroll?
Legal Decisions and Tax Consequences
Why Incorporate?
• Make money for shareholders
• Do warm and fuzzy stuff
• Make money for shareholders
• Limit liability
Type of Maryland Corporations
• www.dat.state.md.us/sdatweb/sdatforms.html
• Limited Liability Corporation (LLC)
• Stock Corporation
• Nonstock Corporation
• Some others, but who cares
S Corp vs. C Corp?
• Taxed once
• Pass-through income (K1)
• Can convert to C Corp relatively easily
• < 100 shareholders
• One class of shareholders
• Taxed at corporate level
• Dividends get taxed again
• Can’t easily convert to S Corp
• No practical restrictions on shareholders
• Multiple classes of shareholders are okay
Form 2553
• States don’t care if you’re S corp or C corp
• The IRS does! File Form 2553 ASAP if you’re going S corp!
Section 83(b)
• Applicable to stock corporations
• Send to IRS
• Protects you from recognizing income on stock that is vesting and increasing in value
• Send it w/in 30 days of incorporation or you are screwed
Why Keep the Books in Order?
Make Tax Filing Easy
• But please don’t prepare your own corporate returns
Make Informed Decisions
• How many more development sprints do I have?
• How will hiring this person affect my monthly burn? I.e. can I hire this person.
• Based off my runway, how urgently do I need to do the horse and pony show?
Make Informed Decisions
• How will increasing marketing spend to $XXX affect my runway?
• How urgently and aggressively do I need to collect on debts?
• How much do I owe to creditors?
How to Keep the Books in Order?
• Simple, repeatable, deterministic processes
• Or pay someone
Accrual vs. Cash Basis
Two Styles of Accounting
• Cash basis: revenue is realized when you get a check or cash
• Accrual basis: income/expenses are realized when you issue/receive an invoice
• Go cash basis.
SAAS Companies
• Invoicing? Who does that any more?
• You’ll probably collect money right away
• Net effect: cash = accrual basis
Services Companies
• Send out large invoices
• Some clients pay when they want to
• You still owe your creditors (credit card)
My Preference: Cash
• I want to know how much cash I have
• Allows for safest decision making
• I still look at reports seeing how many invoices are outstanding (we’ll look at these shortly)
Assets, Liabilities, Equities
Remember this Equation
Assets = Liabilities + Equity
AssetsSomething that can be turned into cash
Current Assets
• Something that can quickly be turned into cash
• Generally:
• Bank Accounts
• Undeposited Funds
• Stocks
Fixed Assets
• Not as quickly turned into cash
• Generally:
• Inventory
• Furniture
• Computers & Equipment
• Note: fixed assets get depreciated
Accounts Receivable
• Money owed to your company
• Only shows on the balance sheet if using accrual basis
Liabilities
• Obligation of an entity stemming from past transactions or events
• Usually results in transfer of assets or services
Remember this Equation
Liabilities = Assets - Equity
Sample Liabilities
• Credit card
• Bank loan
• Line of credit
• Expenses
Accounts Payable
• Money you owe vendors
• Only shows on the balance sheet if recording on an accrual basis
EquityAlternatively called Owners’ Equity, Stockholders’
Equity, etc.
Equity
• What people (you, family, VC’s) put in to fund your company
• Generally:
• Capital Stock
• Dividends
• Retained Earnings
Remember this Equation
Equity = Assets - Liabilities
The Fundamental Reports
The Balance Sheet
• The 50,000’ view
• Shows the “book value” for a specific moment in time
• Doesn’t tell you much about the company’s operations
The Balance Sheet
• Shows Assets, Liabilities, Equity
• Nothing about salaries, wages, marketing expenses, conferences, events, travel, meals, etc.
Check out a Balance Sheet
The P&L Statement
• AKA Income Statement, Earnings Statement, etc.
• Shows income vs. expense over a period of time
• Grouped by income and expense account
Operating IncomeIncome/expense as a result of your normal business
operations
Other Income/ExpenseNot a result of normal business operations (e.g.
dividends from stocks, taxes to foreign governments paid on those dividends, etc.)
Common Income Account Names
• Service Revenue
• Product Revenue
• Write Offs
• Cost of Good Sold
Example Expense Accounts
• Advertising
• Insurance
• Marketing
• Office Equipment
• Payroll Expenses
• Professional Fees
Related P&L Statements
• P&L Detail Statement
• P&L Comparison Statement
Check out a P/L Statement
A/R Statement
• Money owed to you by your clients
• If recording on accrual basis A/R is an asset
A/R Questions
• How much is my company owed?
• How much credit have I extended to my clients?
• How good am I at collecting debts owed to me?
• How much money can I expect to come in soon?
A/R Questions
• Is this client dissatisfied? They’re late on an invoice, which is not a good sign.
• Did they lose my invoice?
• Are they incompetent?
• Do they jerk around their vendors?
A/R Questions
• Who do I need to sue (or at least threaten legal action against)?
• Is this client a deadbeat?
• Is this client running out of cash? Is my client financially distressed? Do I need to stop doing business with this client?
A/R Statement for Services Companies
• Grouped by client
• Further grouped by job
A/R Statements for Product Companies
• Not sure they make much sense if you’re not issuing many invoices
• 37signals isn’t looking at A/R statements
• Create your own reports
Related A/R Statements
• A/R Aging Summary
• Collections Report
Check out an A/R Statement
A/P Statement
• Debts owed by you to vendors in exchange for goods or services rendered by the vendor to your business
• You record a debt to A/P when you get an invoice
• If recording on an accrual basis A/P is a Liability on the balance sheet
A/P Questions
• How much do I owe vendors?
• When do I need to pay the vendors?
• Can I cut some of these expenses?
• Can I negotiate different payment terms?
Check out an A/P Statement?
Nah, pretty much the same as A/R
Accounting Principles
Double-Entry System
• All transactions are recorded in TWO accounts
• You increase one account
• You decrease another account
• (Money doesn’t materialize out of thin air)
Double-Entry System
• The system that has been used for years
• Allows you to...account for everything!
T-Accounts
• Account name at the top
• Debits (Dr) are on the left
• Credits (Cr) are on the right
DEBIT DOES NOT MEAN DECREASE
AND CREDIT DOES NOT MEAN INCREASE
Recall Assets = Liabilities + Equity
T-Accounts / Assets
• Debits INCREASE asset accounts
• Credits DECREASE assets accounts
• When cash hits your bank (an asset), add a Debit entry to an asset account
• When you write a check from your bank, add a Credit entry to an asset account
T-Accounts / Liabilities or Equities
• Debits DECREASE the value of liabilities and equities accounts
• Credits INCREASE the value of liabilities and equities accounts
T-Accounts / Liabilities or Equities
• When you run up your credit card (i.e. use your credit card to buy something), you are adding a Credit entry to a liability account
• When you pay down your line of credit you are adding a Debit entry to a liability account
T-Accounts / Liabilities or Equities
• When you put in personal money, e.g. when you formed your company, you are adding a Credit entry to an equity account
• When you issue a dividend to stockholders you are adding a Debit entry to an equity account
Nifty Things Happen
• Sum of all credits = Sum of all debits
• Credits - Debits = 0
• Sum up everything and it equals 0!!!
• Corollary: if you sum up all your accounts and it’s not 0, you messed something up
Let’s do Some Examples
• Invest $10k into your company
• Invoice a client for $2,400
• Collect $2,000 of that in cash
• Buy a fancy iPad for $500
• Lawyers invoice you $300
• You pay that invoice by check
Let’s do those again in Quickbooks
Tips
• IRS is your friend
• Don’t run payroll
• Don’t file your own corporate returns