Bookkeeping Versus Accounting, Is There a Difference?

Over the years, I have met many clients who came to me to provide accounting and bookkeeping services.  In many instances, I have had to go back three or more years and ‘redo’ the transactions in their accounting software, although they had a bookkeeper who was maintaining the books for those years. It is important that a business owner ascertain that proper bookkeeping and accounting is maintained as this is critical in assessing the financial viability of the company and also in keeping track of the debts of the company and any outstanding receivables.  Often, bookkeeping and accounting is used interchangeably, and while both are financial tools used to record business transactions, there are some differences that are important to understand.  There is an old adage ‘You Get What You Pay For’ and many business owners, not realizing the importance of keeping proper records, will hire someone to keep their books mainly on the cost, because the rate they charge is considered cheaper. Many times, this turns out to be a very expensive learning lesson.  If that person does not understand accounting and is only enter the transactions, without the proper knowledge and experience, then more likely than not, the transactions being entered will not be properly categorized.  For example, if a transaction that belongs on the balance sheet is reported on the income statement, this will result in an inaccurate representation of the Company’s financials.  Which bring up another old adage “Garbage In, Garbage Out”.

 

Bookkeeping is the process of recording the business transactions from bank statements, credit cards, invoices billed, and other source documents.  In bookkeeping the process is mechanical and does not usually require an analysis of the transactions being recorded.  In a nutshell, the process of bookkeeping involves recording in an accounting system such as QuickBooks, or manually, incoming payments received and outgoing payments made.

 

Accounting involves all the processes performed in bookkeeping, but includes additional procedures and analysis.  Therefore, bookkeeping is in fact, a part of the accounting process.  Accounting includes preparing financial statements, such as the balance sheet, which includes the assets, liabilities, and equity of the company, and the Income Statement, which reports the income, expense, and net profit or loss of the company.

 

If you are located in the Laurel, Beltsville, Bowie, College Park, Burtonsville, Silver Spring, Calverton, Baltimore, to name a few, and surrounding areas in the District of Columbia, and Virginia, we would be more than happy to provide you with a free consultation and assessment of your current bookkeeping and accounting Software.  Be proactive, make sure that your records are being properly recorded!

 DONT GET CAUGHT IN A TIME CRUNCH.  MAINTAINING TIMELY BOOKKEEPING AND ACCOUNTING, WILL SAVE YOU MONEY!

 

Hopefully this blog provided valuable insight on what to expect if you plan to start your own business. For more information and insight contact us at ​ (301) 797-8259

 

What Business Structure Should I Choose?

One of the first hurdle most potential business owners face is making a decision on the type of business structure that is best for their business.  The most frequently asked question is “should I incorporate or form an LLC, which one is better”?  In our previous blog, “So You Want to Start a Business”, we discussed the general steps to take in forming a business and getting registered.  This blog provides insight on the different structures of business and some of the pros and cons associated with them. 

Below are the main business structures, keeping in mind that Corporations and Partnerships has several types within the structure, such as professional corporations, non-profit organizations, general partnership, limited partnerships (LP), and limited liability partnership (LLP).

 The Main Business Structures are:

  • Sole Proprietorship – This is the most common structure because of the ease of set-up and the low cost associated with it and less formalities.  A sole proprietor is someone who owns an unincorporated business.  Some sole proprietors will register a ‘doing business as’ DBA with the state of residency and also obtain an EIN number.  For tax purposes, the sole proprietor would report the activities of the business on his or her individual income tax return (Form 1040) on Schedule C.

          Pros

         – Easy to Form

         – Tax paid on income of the business on personal tax return

          – No double taxation

         Cons

         – No personal liability protection

         – Self-employment taxes

  •  Partnerships – This is structure is usually formed based on an existing relationship between two or more persons who wish to do business together.  Each person contributes to the partnership and shares in the profits and losses of the business.  For tax purposes, the partnership would file a return partnership income (Form 1065) which is a pass through return, and provide each partner with a K-1, to report the income or loss in the partnership on their individual income tax return (Form 1040) on Schedule E.

           Pros

           – Income taxed proportionately to partners

           – No double taxation

           Cons

          – No personal liability protection (Unless LP, LLP)

  •  Corporations – This structure has more filing requirements and is formed when shareholders exchange money, property, or both, for the corporation’s capital stock.  For tax purposes, the corporation is a separate tax paying entity from its shareholders.  The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends.  This is known as a ‘double taxation’.  The corporation would file a C Corporation return (Form 1120).

          Pros

          – Personal liability protection

          – Perpetual existence

          – Board governance

          – Corporate tax rate does not go as high as sole proprietors

         Cons

         – Double taxation

         – More expense to establish

         – Regulatory requirements

         – Cannot deduct losses

  • S Corporations – This structure is corporation that has elected to pass income, loss, deductions, and credits to their shareholders for federal tax purposes.  In order to become an S corporation, the corporation must submit Form 2253, signed by all shareholders and to qualify, must meet certain requirements, such as being a domestic corporation, having only one class of stock and no more than 100 stockholders.  For tax purposes, the S Corporation would file an S Corporation return (Form 1120S) which is a pass through return, and provide each partner with a K-1, to report the income or loss in the partnership on their individual income tax return (Form 1040) on Schedule E.

          Pros

           – Personal limited liability for shareholders

           – No double taxation

          Cons

         – Limited number of shareholders

         – More expensive to establish

  • Limited Liability Company (LLC) – This business structure is allowed by state statue and each state may use different regulations.  It is advisable that you check with your state if you are going to form an LLC.  Owners of an LLC are called members and most states allow a “single-member” LLC; those having only one owner.  For tax purposes, the IRS treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). An LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes, unless it files Form 8832 and affirmatively elects to be treated as a corporation.

          Pros

          – Personal limited liability for members

          – No double taxation

          – More flexible and ease of management

          – No limits on number of members

          Cons

         – Members subject to self-employment taxes

Hopefully this blog provided valuable insight on what to expect if you plan to start your own business. For more information and insight contact us at (301) 797-8259

 

 

 

 

 

 

 

 

 

 

 

So You Want to Start a Business?

So you have decided 2016 is the year to follow your dreams, step out on faith, and take the plunge.  You are ready to start your own business and the sky is the limit.  But you are thinking, where do I start?  Making the decision to start your own business can be daunting and scary, but if you are prepared and understand the steps to take, this can alleviate some of your fears.  Of course at this stage you have identified the products or services you will be providing for your business. Make sure to do your homework and thoroughly research the market you plan to enter.    Next you want to think about the type of business ownership.  Will you be a sole proprietor, incorporate, form an LLC (Limited Liability Company), or form a Partnership?  Choosing the best ownership structure will be critical as your business grows and become profitable.  Once you have decided the type of business ownership structure and narrowed down the name of your business, you will need to perform the following tasks to get you on your way to living your dreamspr:

  • Register the business in your state. In the state of Maryland businesses must register with the Maryland Department of Assessment and Taxation. 
  • Set up a business tax account with your state, in Maryland, this is done through the Maryland Comptroller of the Treasury.  If you are selling products, keep in mind that you will need to have a sales and use tax account set up, so you can remit the taxes withheld to the state. 
  • Obtain an Federal Identification Number (EIN) from the Internal Revenue Service (IRS).

It should be mentioned that there are companies online such as Legal Zoom or BizFilings that will perform the tasks of incorporating your company for a fee if you do not feel  you are able to complete them on your own.  You can also can contact a local CPA or lawyer who can complete the forms for a fee.

Once you have completed the task above, you will have to think about opening a business checking account at a local bank.  You will need your company formation documents and EIN number to open the account.  One major pitfall many small business owners make is comingling business and personal funds, this can create problems for the company, as you will not be able to accurately assess how the company is doing and if it is profitable, so make sure that all business expenses are kept separate from your personal expenses.  You also want to make sure that you maintain proper bookkeeping and accounting records.  If you are not able to keep these records on your own, you can hire a local CPA or a qualified accountant who would be able to maintain your records on a monthly basis and make sure that you are capturing all your revenues and expenses accurately.

After these steps, you are ready for your first customer!

open for business

Hopefully this blog provided valuable insight on what to expect if you plan to start your own business. For more information and insight contact us at (301) 797-8259

 

Our New Website Is Live!

Welcome to our new website! We have revamped their website to make it friendlier for the people who visit us on a regular basis. We hope to bring information on budgeting, finances, and how to live a healthier financial life to you through our blog. We will be posting on the blog with thoughts on a number of important topics. Should you have any suggestions on what you would like to see posted to the blog, please leave your comments below. We look forward to speaking with you and hearing your suggestions!