Are you wanting to learn more accounting terms to help you effectively run the accounting of your business? Marvin Morse will help you learn many general accounting terms and the different types of mistakes most entrepreneurs make with them.Sign Up to Watch
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-We're moving here now on to "inventory", term number 15, inventory. "This is the account that tracks all the products that are sold to buyers." Why do we need to keep track of inventory, and what is inventory?
-Inventory is any product, good, tangible item, that is held for sale to others. It does not include tables, chairs, IT equipment, that is not held for sale to others. Those are called fixed assets. So inventory is items held for sale. And they are an asset because it's something you've either paid or owe for that you're offering to sell.
And so you carry it as an asset on your balance sheet, and then when you sell the item, you remove it from inventory as an asset on the balance sheet and show it as a cost of goods sold.
Some typical mistakes I see, difficulties keeping up with inventory. I see entrepreneurs that make a sale of something of inventory, but they leave it in inventory. So it makes their profit and loss look really nice, because there's no-- they sold the widget for $1,000, but they didn't take it out of inventory, the $800 cost, and show it as a cost.
-This could be very dangerous, to not keep track of inventory.
-So if you have like a retail shop or a business that sells a lot of products you keep in inventory, again, in this case would you have a bookkeeper coming almost once a week?
-No. I think I would probably recommend, depending on the type of business, either a perpetual inventory that the entrepreneur or someone in their office would keep track of, or if not, a physical inventory count at the end of the month. So that if inventory in your books is not correct, it can be adjusted to whatever the result of your physical count is.
And I don't necessarily think you'd need to have the accountant do that. Someone in the organization could count it and put the cost on it. You might get the accountant's help as far as how it's recorded, and that type of thing. So a lot of entrepreneurs never take a physical inventory.
-How often should we be taking a physical inventory, Martin?
-My argument is every month, because to me it's important to have accurate monthly financials. If you feel confident that your inventory is correct without the physical inventory, maybe not once a month. But even if not once a month, at least quarterly. So that at least if you're not getting it exactly right on a monthly basis, you catch it up at the end of the quarter.
But if you've got a large inventory, a lot of small items, probably that physical is going to be the only surefire way of making sure your inventory is accurate. And Clay, also a lot of people-- a lot of entrepreneurs-- don't realize that they have to pay property tax on their inventory.
-That's another sneaky expense that slips up on a lot of entrepreneurs.
-That is-- it's like-- you're like a de-motivational speaker when you start talking about paying taxes on that inventory stuff. So that's something no one wants to talk about, but it's something that's true.
-You need to be aware of it. It's a real liability. If you don't file your property tax report, the county assessor will give you an ugly call or ugly letter, or assess you a tax on it using outrageously high figures.
-Let me ask you this, then. Let's say that I own a retail shop, and I have $1,000 of products. What kind of tax do I pay on a monthly basis on that? What kind of property tax do I pay on that?
-Well, it isn't monthly, it's once a year.
-Once a year.
-In Tulsa County, in most counties throughout the country, they have an annual property tax report where you declare your taxable assets and send it down to the county assessor. And then later on in the year-- usually October or November-- they send you back a bill. And the bill varies by school district as to how much the bill will be. It's usually assessed at maybe 10% or 11% of the original cost.
-Then multiplied by the rate in effect for your school district.
-That's not very fun.
-It's not any fun at all.
-OK. All right. You are a fun guy despite the fact that you're giving us all this un-fun information. This is just real talk with an accountant with 40 years of experience, right?
-Did you invent the word "accounting"? Are you one of the founders of that word?
-It was not nearly as well known when I first got in the business.
-It's unbelievable. You're like the corrective business coach for all these businesses. I mean, all these entrepreneurs come in with their wild ideas, and you have to sit down and kind of reel us all in, don't you?
-I've done quite a bit of that. The bearer of bad news,
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-OK, now we're moving into journals, term number 16. This one number is named after Joe Montana. OK, term number 16. Joe Montana, Super Bowl Champion quarterback. Here we go.
This is the place where bookkeepers keep the records of the daily transactions of a business. They then save this information in chronological order. Each active account has its own journal. Talk to me about journals. Why do we have to keep journals? What's a big mistake entrepreneurs are making?
-Journals anymore, with the software that's available, are functions of the software package. So your typical journal you would think of would be your sales journal where you record your sales, and your accounts receivable is generated out of that, your purchases or accounts payable journal where you record all your expenses and generate the accounts payable.
And then you have cash receipts and disbursements where you enter all checks in the cash disbursements journal, all deposits in the cash receipts journal. And at that time they're, coded based on this chart of accounts that we spoke of earlier. And then the software automatically puts that into the general ledger, where we had mentioned earlier that there's an account for each item.
-Where are most entrepreneurs making common mistakes here as it relates to their journals? Are they just not doing them? Are they trying to do them by hand? What kind of mistakes are we seeing big problems with here?
-Either they're not doing them. They're just keeping a checkbook with no real accounting system. I see that occasionally. And we immediately insist that they get an accounting package in either engage the firm or somebody, anybody, to start entering these transactions and processing them through these journals.
-Is there a software package that you recommend?
-The one that seems to be the most popular and the most user friendly where non-accountants can muddle their way through it is a software developed and provided by a company called Intuit, and it's referred to as QuickBooks.
-So QuickBooks is the Marvin Morris in sensational, wonderful world of accounting recommended software?
-Yes, and mainly because it's easy to train our clients how to use it.
-OK, you don't have to be an account to figure it out.
-If you've never done accounting, with a little bit of training and explanation, you can learn to get your items in QuickBooks. Now, you may have questions from time to time that something comes up you don't know how to handle.
You don't know what journal to put it in, or what chart of account code to charge it to. Or you've taken out a note, and you don't know how to get that on your books. That's where the good relationship with the accountants office we would pay off because you could simply call up or email, and find that out and do that.
-You just have to have an accounting service helping you?
-It's the safe thing.
-OK. Now, moving on to term number 17. Here we go. Term number 17. Here we go. The folks at home are excited. Payroll. This refers to how a company pays its employees. Managing the payroll is typically a core function of the bookkeeper and involves reporting much information to the government.
Payroll. First off, what does payroll mean? What are we talking about here?
-Well, payroll, of course, is the process of not only paying your employees when payday rolls around, but also withholding taxes, depositing those taxes with the state and federal authorities on a timely basis so you don't incur major penalties, recording them into your books in a proper place such as payroll tax expense and direct labor, and general administrative salaries. And that's the process of payroll.
-What kind of mistakes do entrepreneurs make on payroll? Is it just filing everything wrong and not withholding taxes? I mean, is it just-- what's the most common errors you've seen?
-There's so many errors. One big error is entrepreneurs treat employees as independent contractors when they're really not. They don't withhold taxes. They just write them a check. And that can lead to some very unpleasant situations if the employee becomes unemployed and goes down for unemployment and that type of thing. And you not treated them as an employee. Could get kind of ugly. That's the first mistake.
The second mistake is they try to do it themselves. And I don't recommend that most entrepreneurs do their own payroll. That they would engage a payroll company to do that.
-What does that cost? I mean, if I'm watching this and I'm doing-- let's say I do $50,000 a year of business. So it's just like myself and one employee. It is a bookkeeper $100 a week? Or is it thousands of dollars a week? I mean, what's a bookkeeper cost to do these kind of payroll services for you?
-There are companies that specialize just in payroll. They don't do your bookkeeping. But they will process your payroll. They'll either send you checks to sign to give your employees and/or they'll direct deposit the employee's money in their account.
They will either pay your federal and state withholding and social security and Medicare for you, or send you checks so you can take them down to your bank and do it. They'll send you a summary showing how to record your payroll in your books, so that you're showing all your different payroll and payroll tax expenses.
There's national organizations. There's local payroll services in each locale. They typically run-- in your example, I would imagine that process would cost you maybe $50 a month. $600 dollars a year. And what do you get for that? You get the ability not to spend time on payroll.
You don't have to worry about payroll tax deposits being may late. The penalties on that alone can be 20%. So it would not take many missed deposit deadlines to more than equal the $600 cost of the payroll service.
That's why I categorically recommend that service to startup entrepreneurs. Now, after a bookkeeper is on board, if that person has the time and the inclination, then they perhaps could do the payroll internally.
-Now, what about the trial balance? This is the final term, number 18, numbered here after Peyton Manning. This is in honor of Peyton Manning, number 18. Here we go. The trial balance.
This is the process that you use to make sure that the books are in balance before pulling together the information for the financial reports and ultimately closing the books for the specific accounting period. Marvin, trial balance. Why do we need to know about This and where do entrepreneurs typically go wrong?
-Well, a trial balance is simply a listing by account number of every category in the general ledger. So rather than produce the general ledger that shows every transaction that the business has incurred that month, or that year to date, or whatever time period you're looking, whatever accounting period you're studying-- could be numerous pages-- the trial balance simply takes the ending balance of each of those categories, and just produces a two or three page printout of that.
So overall, when it comes to being familiar with these terms, in your mind, does it makes sense for every entrepreneur to at least know what these terms are, and then go out and immediately find an accountant or bookkeeper if they don't have one?
-Well, I certainly think they need an accountant or bookkeeper. Because there's only very few entrepreneurs, unless they're an accountant starting their own firm. But not too many entrepreneurs doing that, so they just don't have the necessary background and training. They need advice.
It's good that they have a general sense of these items. I wouldn't say they have to have a deep understanding of how-- if they have a good relationship with their accountant, the accountant should be able to cut right to the chase and help them identify the things they really need to know to run their business.
Because we can't forget that the entrepreneur doesn't make any money studying accounting. He produces revenue by going out and selling or performing the work. So while this is all very important, it needs to be done in a very expedient, efficient manner so that the entrepreneur can be back on the job producing revenue or there won't be any need to study these numbers because he won't make profit, and he won't be in business.
-I love how you see the balance there. You see the entrepreneur should do what he does well. The accountant should be doing what they do well. And you work together as a team there.
And I just want to belabor this because I know I meet probably three out of four the entrepreneurs that reach out to me for help as a consultant who do not have an accountant, who do not have a bookkeeper. And I'm always like, please go find one. I try to stress as much as I can. Go find a bookkeeper.
Final thing I wanted to clarify is, could you clarify what the difference between an accountant and a bookkeeper is? Are they were one in the same? Are they different? Where the roles of the accountant and the bookkeeper?
-Typically, the bookkeeper is maybe someone that doesn't have a degree in accounting, that has studied, maybe has been out in business and learned it just by doing it. Maybe they worked under someone for a period of time. They've been doing bookkeeping for a number of years, and they've just pretty well learned how to be a fairly good bookkeeper just by the process of being exposed to it.
Where as an accountant, you think more of a, maybe a degreed person, or least some amount of education to go with it. And maybe having the ability to do maybe a little more than just the bookkeeper.
Because the bookkeeper doesn't have any training other than just what they've learned doing it down through the years. But there are many good bookkeepers that can keep very accurate balance sheets and profits and losses that are not accountants or CPAs.
-Well, Marvin, I appreciate you coming in here and introducing us to the Marvin Morse wonderful world of accounting. It has certainly lived up to the hype. And I appreciate you because these are things that entrepreneurs need to know that we just don't know.
And I think it's important that we learn these terms and at least educate ourselves so we can have coherent conversations with these tax planning professionals. So thank you so much.
-Sure. My please, Clay.
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