How is Your Bookkeeper Doing?

It has been a rewarding couple of months. I have not posted anything recently as I have been going to school full time and working two jobs, averaging between 36 and 48 hours a week. One of the jobs has been a wonderful internship were I was able to redesign a small business’s accounting system. Then I was able to create a training program for new employees at the company to help prevent the crumbling of the new system.

Today, I wanted to address the need for a good bookkeeper at a small business. Most small businesses employee only a handful of people and are unable to meet the demands of the fast paced business world. The bookkeeper is not one that the owner should skimp on.

A good bookkeeper can fix a couple of problems that I have seen keep owners up at night worrying.

Answer these questions to yourself:

Before paying employees or writing checks to vendors do you check your bank account, online, for your balance?

Do you understand how to pay your employee withholding taxes and are confident that they are paid on time, with the right amounts, and the right categories are being paid?

Are all your expenses being accounted for to include your quick run to the local hardware store for a couple of bolts or other small amounts? Those bolts can add up over the course of a year.

Can you print off your financial statements, have those accurate, and give you a good picture of your business?

Do you know what the financial statements are? *hint* Income State (also called a Profit and Loss) and Balance Sheet are the two most important for small business.

If you answered yes to these you probably need to look at your bookkeeping(er’s) skills.

One of the biggest problems that will get a small business owner in trouble is employment tax withholdings. These are trust funds that if mishandled can actually land the owner in prison. Anyone that had access to the withholdings and accounting of them can be held responsible, that includes the bookkeeper.

Hand in hand with this problem is whether the system is reconciled every month or more often. Your system should be keeping an accurate account of your checking account at your bank. When you write checks your system deducts that amount from your checking account (if you have multiple accounts, does the bookkeeper know which account to deduct it from?) I have actually worked at a place before that the bookkeeper yelled at me because I didn’t cash my check for over a week after receiving it. They were paying their bills by what was reported by the bank on their online website. The bank doesn’t know about the outstanding checks.

If your account is reconciled and tracked properly by a good bookkeeper, you will know the exact amount of your account on any day. Not what the bank says, but what is still in transit. That can be really helpful, especially if a floor checker shows up and demands payment for inventory that was recently sold.

A good bookkeeper keeps the accounting system running fluidly. This means that if you are worried about your business, you can print off your income statement and know that it is accurate. Instead of going home worried about how the month is looking, you can go home looking at exactly how you are doing and be thinking how to fix it if you are having a slower month.

Now there are a few warnings to mention here. A good bookkeeper understands your accounting system, probably better than you do. This always put the owner at a little bit of risk of embezzlement. Since you have so few employees there is limited ability to have separation of duties which is one of the key functions of internal control.

The bookkeeper should not at any time have access to funds. The cash should be handled by the owner if no one else is available. The owner takes the nightly deposit to the bank. The bookkeeper creates the deposit but the owner handles the money.

A couple of examples of weaknesses that I have seen:

The bookkeeper prints two checks a week for him/herself and then has them separated in the stack of checks when the owner signs them. The bookkeeper can create a mythical vendor and send checks to their selves through a PO Box.

Understanding your financials and paying attention to your business can help prevent these. Set up the system so that the bookkeeper has to show supporting documents of the checks. Is there a purchase order or a bill from the vendor?

An owner that is not paying attention because they do have a good bookkeeper is all the more likely to be taken advantage of even if they think they can trust their bookkeeper. A good bookkeeper with an owner that is paying close attention to their business is much more likely to succeed.

If you are in the Southeastern Idaho location and want help with your bookkeeping please take a minute to look at my services.

Progressive Tax System

“Over and over again, courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced extractions, not voluntary contributions.” Judge Learned Hand, Commissioner v. Newman, 159 F.2d 848 (CA-2, 1947).

Thanks to this ruling every individual is right, in trying to pay the littlest amount of taxes that they are required. The other day, I was talking to a veteran IRS agent who said he was auditing a business and was actually able to give them a refund. Though this does not happen often, it does indicate that we are right to try to pay less.

To understand our tax system today we have to first understand the idea of equal pain, as Congress thinks it should be. We always have the right to disagree and we can act on that disagreement to change our tax system.

The idea of a fair tax system starts by debating how to make everyone feel the pain of paying taxes equally. The way Congress has decided to distribute that pain is by looking at the different classes and the revenues they each make. A person that is in a tight position in life, say a single mother of six working as a clerk at a gas station, values $20 more than a CEO of a large corporation that makes six or seven figures a year.

Marginal and Effective Tax Rate

Next we have to understand the idea of a marginal tax rate. The marginal tax rate is the rate we pay on the next dollar of income we make. If we are in the 25% marginal tax rate bracket, we pay $.25 on every additional dollar we make while in that bracket.

With this in mind we can then discusses the basic individual income tax schedule and how it applies to all US Citizens. The table below in the 2012 individual income tax schedule.

Marginal Tax Rate	Taxable Income Upper Limit
10	8,700
15	35,350
25	85,650
28	178,650
33	388,350
35	Over 388,350

The schedule changes for married and corporations but the concept is the same, progressive. For the first $8,700 of taxable income everyone pays the same 10% on it. If you make taxable income of $100,000 then the amount of taxed owned would be:
10% of 8,700    = $     870 15% of 26,650  =     3,998 25% of 50,000  =   12,500 28% of 14,350  =     4,018   Total Tax Liability $21,386
This means that with $100,000 of taxable income, you have a marginal tax rate of 28% since the next dollar of income will be taxed at 28%. But the effective or real rate of tax is the tax liability divided by the taxable income:

21,386 / 100,000 = 21.4%

The 21.4% is the real tax rate for the person. 

This progressive system means, as the example shows, that no matter the amount of income, everyone pays the same portion of taxes on the same amount of income. Thus the poor pay the same amount as the rich for the first $8,700 of income. Then as the rich make more, they are required to pay a higher percentage to the government.

Taxable Income 

Taxable income is where we start to see a lot of differences. The tax code has over 73,000 pages which is exceptions to the general rules and code trying to prevent loop holes. 

It takes a Master's degree or PhD to learn the tax code and really then  you are just learning how to research really well. Thus the reason why tax CPAs and Lawyers are able to charge so much. However, taxable income is what everyone has left after they figure in their home owners deduction, children deduction, going to school deduction and so on. 

Tax Loop Holes

If you really want to play into the idea that there are loop holes for the rich, then you are partially right. The thing about the loop holes plays back to the original quote from Judge Learned Hand. Everyone can take advantage of them, however, the rich are better equipped to do so because 1) they can pay for the CPA to find it for them and 2) the have the money to take full advantage of them.

A great example of this "Loop Hole" is capital gains. The best example of capital gains is dividends to individual shareholders. The everyone in the world can buy shares in a corporation either through a stock brokerage or online using discount traders such as eTrade. 

The rule is that capital gains are taxed at 0% or 15% depending on the amount of taxable income you have. The poor do not pay anything on capital gains and the rich only pay 15%. Congress passed this law to stimulate the market so there would be more buying and selling of stock. The problem here is that the average person has very little money to invest in buying stock. They are more concerned with buy food and gas than stock. 

The rich on the other hand, have the money to put into investing. Then there are people that all their money on the stock market or in other forms of investing that result in capital gains. A great example here is Mitt Romney. During his campaign, the media made a big deal about his effective tax rate. Most of his income comes in the form of capital gains. One example is that he took a lot of risk, investing in a small office supply store in California that grew into Stables. 

So all his taxable income result from capital gains, taxed at 15%. Then you take into account any deductions he qualifies for such as charitable contributions and then *puff* you get the reported 14.1% effective tax rate that he claimed to have paid. He paid a lower effective tax rate than his own secretary  who was making wages and would have to pay taxes using the normal progressive tax schedule. 

Thus a loop hole for the rich. I'm not saying that this is right or wrong. One day I hope to fully take advantage of this "Loop Hole" as everyone can. However, I am also not pushing my beliefs onto anyone else, and can easily see how this is wrong. So if you disagree you can change it, that is the beauty of our democratic system (as long as it is working properly).

Who am I

Hello,

I hope that my advice here will benefit someone somewhere. Even if just one person is helped by my information, then I feel like I have succeeded in creating this blog.

To start off, I am a Veteran of the Iraq War. I enlisted in the United States Army in 2002 in Infantry. I ended up doing eight years with the Army achieving the rank of Staff Sergeant. I deployed three times to Iraq spending 39 months total there. I was a member of the 1^st Cavalry Division for three years, four years with the 82^nd Airborne Division, and I spent one year in Special Forces training to become a Green Beret. Instead of finishing training I chose to voluntarily withdraw from training so that I could better care for my family. I decided to then attend Idaho State University perusing a degree in accounting.

Currently, I am a senior, looking to graduate December of 2013. At which time I will meet the requirements to take the CPA exam. I am looking to conduct an internship at a national Accounting Firm this summer. I am placing in the top ten percent of my college resulting in being placed on the dean’s list several times and induction into Beta Gamma Sigma Honorary Society. I am a member of Beta Alpha Psi Accounting Club and the Veterans Club.

I currently work for a small business lawn mower retail and repair shop. We specialize in Toro, Stihl, Hustler, and Walker power equipment. I spend a lot of my time helping the owner make decisions and understanding accounting principles.

I am not a CPA yet. I am still a college student. For now I hope to encourage other students, veterans and non veterans alike to stay in school despite the challenge. I also hope to help other business owners and professional understand the basic accounting principles, so they do not feel lost when talking to their CPAs. As a senior in college, I am well versed in the basics and they are still clear in my mind.

As my skills increase and as I get further into my chosen profession, I hope that I can help many people to make better business decisions, use their accountants properly, and overall benefit the economy and society.

Some of the topics I plan to cover in the coming months are:

• Good study methods for the beginning freshman
• How to get that first job
• What is double entry accounting
• Different Accounting methods (Accrual, Cash, and Hybrid)
• Inventory methods
• Time Value of Money
• Inventory
• Good Ideas for how to use your bookkeeper

Feel free to leave any comments and suggestions, thank you.

Jason