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