Copyright 2018 - Pfeiffers Accounting & Consulting LLC

In accounting for your expenses or prepaids on the income statement or balance sheet, these costs may be applicable to past, present or future periods.  So what does that mean?  Well, there are expenses that are considered expired costs.  These expenses are costs that have no future benefit such as insurance expenses.  They only apply to the period they benefit. Some other costs that are considered expired costs are cost of goods sold an period costs (selling, general and administrative costs) since these are only reflected in the period incurred. 

Prepaid expenses on the other hand, are considered current assets, which  belong on the balance sheet. Some examples are prepaid insurance and service contracts.  These expire when they are 'used up' in that period. 

Finally, unexpired costs are things such as fixed assets and inventory.  They are on the balance sheet and are capitalized (depreciated). They will be eventually matched with future revenue.  These are considered 'deferred' charges until they become an expense in the future.

Cost basis is the amount of a taxpayer's investment in a property for tax purposes.  A gain or loss is determined by subtracting out the adjusted basis (discussed later) from the proceeds of the sale, exchange or disposition of property. Your adjusted basis will determine what capital gain or loss you have when you sell the property.

Some rules with basis in determining gain or loss are as follows:

  1. Real property (also called real estate which is anything built on, growing on, or attached to the land): To figure out the gain or loss on the sale, exchange or disposition, a taxpayer must make certain adjustments. These adjustments result in the adjusted basis. Once sold,  the adjusted basis would then be deducted from the property's fair market value to determine the capital gain or loss on the sale.
    1. Some things will increase the basis such as capital improvements (adding a bathroom or bedroom, installing a new roof, etc)  or assessments for local improvements (add property assessments for improvements that increase the value of the property assessed to the basis like roads, sidewalks, etc)
    2. Other things will decrease the basis such as casualty and theft losses, easements, depreciation an section 179 deductions. 
  2. Property received for services: If a taxpayer received property for services rendered, its fair market value ( what it is worth today) must be included in income.  The amount included in income becomes the basis.
  3. Involuntary conversions: If a taxpayer received replacement property because of an involuntary conversion, such as a casualty, or theft, or condemnation, the basis of the replacement property is calculated by using the basis of the converted property.
  4. Property received as a gift: To figure out the basis of property received as a gift, a taxpayer must know the adjusted basis to the donor (source of gift), it's fair market value (FMV) at the time of the gift, and any gift tax paid.
  5. Inherited property: With the exception of 2010 transfers electing the modified carryover basis, a gain on inherited property is always long term.  Basis of an inherited capital asset is generally the fair market value of the property on the date of death or an alternate valuation date, if elected by the personal representative.  In other words, no matter what the cost (basis) was, the basis is the fair market value so there will be no capital gain or loss on inherited property, unless it is a 401K or other retirement which in this case is fully taxable income, and thus a capital gain property.

 

At the end of each month, you should have some type of system you follow to make sure you are closing the month's financial data properly. This will ensure more accurate records. To manage month end, some procedures must be followed to do so.

  1. Sales and cash receipts must be accurately recorded. By making sure that the money received for the month (including the last day of the month) is recorded in that month, you will make reconciling much simpler.
  2. Any accounts payable checks written for the month must be put through by the last day of the month in the accounting records.
  3. Inventory must be updated for all sales orders (closed out as invoiced). All orders that were actually ordered for the month must be input into the system by the end of the mont. In addition, counts and recount procedures must be done by the warehouse to ensure accurate inventory on hand.
  4. Miscellaneous charges to bank account recorded accurately.
  5. Any checks written for miscellenous items/charges for the entire month must be recorded in the system by month end.
  6. All journals/modules (cash receipts, sales, inventory, accounts payable) must be updated for all transactions by the end of the month. 

Keeping the month end procedures working systematically will make your accounts accurate and up to date.

Copyright Jeanine Pfeiffer

Making sense of your inventory actually starts with setting up your items in your item list. To make it as simple as possible, set up your list according to product lines.  Within those product lines, you can have items numbered and in alphabetical order. This makes it much simpler to find what you are looking for when you want to check the stock of what you have.  For instance, say you own a furniture store, a sample item list would be like this:

Item nuber       Description           Product line             Quantity on hand

11500951         Lamp                    Lighting                    20

11600201         Vase                     Accessories               15

11250005         Chair                   Furniture                   70

11250091         Sofa                    Furniture                   50

 

You can run reports based upon the product line in this way, thereby pinpointing items more easily.  

 

In accounting, you have probably heard the words transaction processing but do you really know what it means?  Simply stated, transaction processing is a series of events that takes place to post your transaction into your accounting records.  So, it starts with putting your entry into two or more T-accounts which is in other words, your journal entry.  It will then be posted into journals specific to the transactions. It could be in the cash disbursements, purchases, sales, cash receipts, or general journal. Once it is cleared into these journals, it makes it's way to the general ledger, where all transactions, by individual account, are posted. They are all posted with detailed debits and credits for each account, with a balance at the bottom. All end balances then go to the income statement or  balance sheet, depending upon if they are assets/liabilities/owner's equity (balance sheet) or sales/cost of goods sold/expenses (income statement).  That's all there is to transaction processing.

Copyright Jeanine Pfeiffer

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