Accounting

Understanding Goodwill in Accounting

You might know the word “goodwill” as the name of a local charity where you can drop off household items you no longer need. It might also be something that’s talked about at church. But in accounting circles, goodwill is something completely different.

Goodwill is an account on the balance sheet of certain businesses. It falls into the category of assets, and specifically, it’s an intangible asset. An intangible asset is something that is not physical. Examples of other intangible assets are copyrights, patents, and trademarks.

Goodwill arises when one company purchases another. When a company pays more for the company that it is acquiring, the difference is booked as goodwill. Goodwill represents the extra value that the acquisition provides for the purchasing company.

When one company buys another, the assets and liabilities of the acquired company are taken over by the purchasing company. They are recorded on the purchasing company’s books at their fair value. The balancing entry between the fair value of the assets and liabilities purchased and the purchase price is booked to the goodwill account.

What could lead a company to pay more for another company? Things that are not on the balance sheet but are valued could include a solid customer base, great employees, brand reputation, the company name and what it means, technology owned by the company, and a great reputation for customer service.

Normally, an intangible asset like goodwill would be amortized, but it is not. Amortization is when a portion of the asset is expensed each year. A patent, for example, is amortized over its useful life, not to exceed 20 years. Amortization is comparable to depreciation. Some physical assets are depreciated, while some intangible assets are amortized.

Before 2001, goodwill was amortized for up to 40 years, but the accounting rules have changed to something less arbitrary. Goodwill must be checked each year for “impairment.”

Goodwill impairment happens when the value of the acquisition declines after it has been purchased. One of the most famous impairments write-downs occurred right after this new accounting rule was implemented. In 2002, $54.2 billion in impairment costs was reported for the AOL Time Warner, Inc. merger.

More recently, in 2020, a few of the largest impairment write-downs included companies, such as Baker Hughes, Berkshire Hathaway, and ATT, due to the latter’s acquisition of DirecTV in earlier years. In 2022, impairment write-downs included Teladoc Health and Comcast. Covid-19 was in part responsible for a large number of impairment write-downs in recent years.

If impairment is required to be booked, the journal entry will look like this:

Debit Impairment Expense (increases expenses and therefore reduces profits)

Credit Goodwill (reduces the asset amount)

If your company has acquired other companies and you have a goodwill account on your balance sheet, you can work with your accountant to determine how to check for impairment and if you are required to correct your books.

25 Questions to Ask When Hiring an Accountant

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A lot of times, new business owners ask us one question: How much will it cost for you to do my accounting? And, we’re happy to answer that question as soon as we find out more about your business and whether we can help you with what you need. 

However, you might want to ask us more questions than simply inquiring about our fees.  Here are some to consider. And yes, feel free to grill us. We appreciate your interest and want you to know us better. Setting expectations at the beginning contributes toward a healthy long-term relationship between a business owner and their accountant.   

  1. How long have you been in business?
  2. What experience do you have with companies in my industry?
  3. What experience do you have with companies at my revenue level?
  4. What professional bookkeeping, accounting, and/or tax credentials do you have?
  5. How skilled are you with technology?
  6. What accounting software do you support?
  7. Have you earned any accounting software credentials?
  8. Do you partner with any accounting software vendors, and what benefits do your clients receive from your partnership?
  9. What accounting services do you offer? Do you have a specialty or favorite service or niche?
  10. What services are inhouse and what is outsourced by you to other vendors? (example: payroll)
  11. Are your employees US-based or overseas?
  12. What size is your team, and who would support my business?
  13. How do you bill for services: flat-rate or hourly?
  14. How long is my initial rate locked in for?
  15. How often do you raise prices on clients?
  16. What price would you charge to perform the services I need?
  17. Do you offer a guarantee or warranty on your work?
  18. How do you protect and secure my financial data?
  19. Who in your company and supply chain will see my financial data?
  20. How secure is the accounting software you use?
  21. Do you require me to sign a contract or engagement letter?
  22. What is your cancellation policy?
  23. If I pay for software through you and decide to cancel, what happens to my software and data inside the accounting system?
  24. Is your firm environmentally-friendly?
  25. Does your firm support diversity and inclusion?

Five Accounting Reports You Don’t Want to Be Without

While we all have to keep our monthly books up to date for tax and other compliance reporting purposes, we should never stop there. Your books hold a wealth of information that you can use to run your business better.  Here are five reports you should never be without.

Budget-to-Actual Profit and Loss Statement

Hopefully, you’ve already seen how powerful the Profit and Loss Statement is. Let’s take it a deeper level and add budget comparison to it.  With this addition, you can plan your way toward the sales and profit figures you want. You’ll know every month whether you’re on track, ahead of the game (give yourself five stars!), or need to hustle to make it up next month.

Most accounting systems allow you to enter monthly budget numbers for your sales and expense accounts.  You can enter them at the beginning of each year and adjust them throughout the year. It’s kind of like having Google Maps on a cross-country journey. You will be able to see where there is construction and traffic, so you can take another route. You can also see where there are cool places to stop, so you can take advantage of the fun. Your numbers tell a story.

Actual-to-Prior-Year Profit and Loss Statement

This is an easy report to generate, assuming you have at least two years’ worth of information in your accounting system. This report allows you to compare your business’s results for this year with how you did last year.  Are you ahead? Behind? Have new products and services? New employees?  New expenses?

With this comparison, you can take action based on how you would like your business to perform this year versus last year. While this report is readily available, few businesses study it to glean the insights available, so be sure to spend some time analyzing the data in this report.

Sales by Item, Customer, or Division (or All Three)

Inside every business’s sales information is a treasure trove of possibility. Where are you seeing growth, and how can you capitalize on it? Where do you see a slowdown, and can you run a promotion to juice things up?

Choose the breakout – customer, item, division, or another – that is meaningful to your business type. If possible, arrange for a searchable database so you can drill down into the detail even more. What trends do you see?  What opportunities do you see?

Operations Reports   

To find out more about your profitability and to get into the details of how your expenses are matching up with your sales, you need to review your operational accounting reports. The exact report will depend on the type of your business.  If you are in services, you’ll need payroll reports and time sheets. If you are in retail, you’ll need inventory reports. If you are in construction, you’ll need job cost reports. And if you are in manufacturing, you’ll need cost of goods sold and other reports to evaluate assembly and production efficiency.

Cash Reports

The last report that is essential for good business management is all about cash. There is more than one option here, and these reports can include Accounts Receivable Aging, Accounts Payable Aging, cash flow forecasting, and various cash flow reports.

If you grant customers credit, you’ll want to actively make sure that money is collected on time from clients. If customer balances get too old, action must be taken. Even if you don’t grant credit, transactions such as returns, expired credit cards, and bounced checks need special attention.

The same is true for amounts you owe to vendors, with the Accounts Payable Aging report.

If you run tight with your cash balance, you may want to have a cash flow forecasting report on hand. This report gives you good warning as to when your bank balance may dip below your needs.  You can then delay vendor payments or find an infusion of cash to cover the shortfall.

With these five categories of reports, you will have dozens of opportunities to be proactive about running your business and improving your results.  And if we can help you find or generate them, please reach out anytime.

30 Reasons Why It’s Better to Have Professional Help with Your QuickBooks® Software

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If you own a small business, you probably chose QuickBooks® as your company’s accounting software. After all, it’s the market leader in small business accounting software. While it’s intuitive in some places, there is a learning curve that everyone must go through in order to use the software properly.  There are also places where you need to know some accounting in order for transactions to be booked correctly. 

The good news is there are plenty of accounting professionals that know QuickBooks that can help you through the learning curve and answer questions that come up in the normal course of business. As a small business owner in these chaotic times, you must choose which learning curves to tackle and which ones to delegate or hire for. You can’t learn everything you need to know as an entrepreneur all by yourself; there’s just not enough time. It makes sense to focus on the core of your business with the limited time you have. 

The worst thing you can do is to try to learn QuickBooks by yourself. If it’s used incorrectly, the mistakes multiply, and suddenly you have a year’s worth of inaccurate transactions that need to be fixed, one by one. This gets expensive.  Here are 30 places where untrained QuickBooks users can get themselves in trouble.   

1. Broken bank feeds

The integrated automation between your bank and QuickBooks software is called a bank feed.  When these feeds break or become disconnected, they need to be restarted. If they are restarted incorrectly, transactions could double up or be missing completely.  This causes the bank balance to be wrong as well as other parts of your accounts, such as expenses or sales. 

2. Loan payments

Almost every loan payment consists of principal and interest. It’s common for loan payments to be coded to an expense account or the loan balance without being broken out accurately. This misstates the loan balance as well as expenses. 

3. Undeposited funds

Often, untrained QuickBooks users leave a balance in the clearing account called Undeposited Funds. This understates the bank account balance. Another common occurrence is for the user to record a customer payment twice: once in Undeposited Funds and then again in the bank account when the deposit is downloaded through bank feeds. The results in overstatement of income.

4. Owner’s draws and distributions

When owners take money out of the business, it’s called a draw or distribution. This transaction needs to be properly reflected in the Equity accounts. It’s not an expense. It’s common for your QuickBooks beginning balances and your Equity accounts to be wrong if they were not set up correctly from the beginning.  This requires knowledge of accounting, your type of entity, and the software.

5. Bank reconciliation

Because of the automated bank feeds, you might think that you don’t need to do a bank reconciliation any more.  But that’s simply not true. Transactions can be duplicated, go missing, or be coded wrong, which all can cause an incorrect balance. 

6. Write-offs

Most businesses need to write off a customer’s receivable that is no longer collectible or inventory that has lost value. This transaction requires special accounting knowledge to get it booked right in QuickBooks. 

7. Chart of Accounts setup

If the Chart of Accounts in QuickBooks was not originally customized to your business, you probably don’t have the accounts you need. You may also be using some accounts incorrectly. And if there are a lot of accounts you don’t use, then they need to be removed to save you time from scrolling through them all the time. 

8. Vendor setup

When you first pay a new vendor, it’s important to take the time to add them to the software completely, including asking for a W-9, sales tax exemption certificate, certificates of insurance, and other relevant documents. You may also want to track information that is not included in the standard QuickBooks setup. Setting up custom fields for vendors will help you track additional information.

9. Cash versus accrual adjustments

Your books can be reported in two different bases: cash and accrual. For tax purposes, you might need cash basis. For reporting purposes, you might prefer accrual basis. A professional can help you make adjusting entries when required, generate reports using the correct basis, and help you understand when you need each one. 

10. Sales tax

If you collect and pay sales tax and rely upon your accounting system to provide you with accurate sales numbers, your invoice transactions must be booked correctly. Your sales tax rates must also be set up accurately, and you must keep up with which items are taxable and which are not.

Once you remit sales tax, it must be booked to the correct liability account, and any discrepancy must be adjusted. 

11. Bill payment and check writing

Users new to QuickBooks can easily confuse the bill payment function with the check writing function.  If you enter a bill, you must pay it instead of writing a check.  Or you can simply write a check without entering a bill.  When used incorrectly, it can double up expenses and leave a balance in Accounts Payable that should have been cleared. 

12. Adjusting journal entries

It can be necessary at times to make journal entries to adjust account balances in QuickBooks. However, most of the time, a transaction function should be used instead, as when adjusting Accounts Receivable, Accounts Payable, Payroll, and many other accounts and functions.  Making the right adjustment requires a good knowledge of accounting as well as the software. 

13. Short cuts

Accounting professionals knowledgeable in QuickBooks can save you hours on your accounting by teaching you shortcuts, tips, and tricks that you can use when working with the software.

14. Classes

QuickBooks includes the capability of categorization, and you can customize this feature based on the needs of your business. An accounting professional can help you strategically think about how best to customize this feature based on their experience working with other businesses. 

15. Custom reports

Do you spend a lot of time exporting data from QuickBooks into spreadsheets and then manipulating the data to a format you need?  If so, you might be able to save time by getting help from a pro who can customize a report for you right in QuickBooks. 

16. Job costing

Job costing is not easy to set up, but once it is set up correctly, you’ll love the information you can get from the reports. You’ll be able to see your profitability, get larger draws sooner, and manage your business better. 

17. Items

In QuickBooks, items are things you sell. They can be goods, services, parts, or many other things. When items are incorrectly set up or used, it can mangle your account balances as well as cost a small fortune to fix. Items differ substantially from business to business. Some businesses are trickier than others to set up: restaurants, construction, attorneys, to name a few. Do NOT get advice from another business owner when setting up your items. It’s critical to get an accounting professional with expertise in QuickBooks to help you with this part of the software. 

18. Payroll

Payroll has gotten so much more complex over the years. Especially if you are switching systems mid-year, get an accountant to help you set up payroll when you first get started. 

19. Additional features you might not know about

QuickBooks software has been around since the 1990s. That makes it a very mature, robust application. There are many features you might not know about that could save you a great deal of time on your accounting chores. Learning from a professional can be very cost-effective and a good investment for your business.

20. Deleting anything

It’s a good idea to clean up unused accounts, items, vendors, customers, and other entities in your QuickBooks file, but doing so could cause huge problems.  It’s best to get help if you need to delete a transaction or a master file item. 

21. Coding errors

Sometimes, mistakes in coding are made. Correcting them can be harder than it looks. If you have a large number of transactions to correct, there are shortcuts you can learn to save yourself a lot of time.

22. Credit card reconciliations

Hopefully, any business credit card transactions that you have are automatically input into QuickBooks by using bank feeds. Just like the bank account, they need to be reconciled every month. 

23. User permissions

It’s good practice to tighten up any user permissions so that workers see only what they need to do their job.  A professional can help you customize user permissions to strengthen your internal control and reduce risk of fraud.

24. Known bugs

An expert in QuickBooks will know where some of the bugs are because they work with it all day long, every day, on multiple client accounts.  They can help you save time by knowing where things might cause you trouble and alert you ahead of time to the problem and any potential fixes. 

25. Unknown bugs

While an accounting professional might not know where every software bug is, they will know when you experience a bug that needs to be reported to the QuickBooks support team. They can help reduce the amount of time spent on such things and perhaps even suggest a workaround. 

26. Inventory reconciliation

If you sell physical goods in your business, you probably have an inventory. Periodically, the physical inventory needs to be reconciled with the inventory in QuickBooks. Professional help is advised when making adjustments to reconcile the books. 

27. Prior period transactions

Once a tax accountant has received your account balances for year-end reporting, nothing should be changed that is dated in a prior year. There is a way to lock these transactions so ending balances will still match beginning balances for next year’s reporting. 

28. Software licenses

Intuit, the company that makes QuickBooks, requires that each QuickBooks user hold a software license that is paid for. A professional experienced with QuickBooks licensing can help you stay compliant based on the number of users you need to access the account. 

29. Passwords

Good password management is essential to keep hackers away from your private data. Use strong passwords that are long, contain no dictionary words, include special characters, numbers, and upper- and lower-case letters. And if you lose a password, a professional can help you recover it. 

30. Settings

QuickBooks allows for customization, and much of this can be accomplished in the settings or preferences.  These includes features such as whether you want to number your accounts, turn off classes, and activate a number of other features. These decisions should be made proactively and strategically, and are best made with the advice of an accounting professional.

QuickBooks ProAdvisor Certifications

There are two certifications that an accounting professional can achieve for QuickBooks Online:

  • Certified QuickBooks Online ProAdvisor
  • Advanced Certified QuickBooks Online ProAdvisor

These certifications are offered by Intuit and require the accounting professional to complete training and an exam. The Advanced exam is quite difficult.

For QuickBooks Desktop and other products, these certifications are available:

  • Certified QuickBooks Desktop ProAdvisor
  • Advanced Certified QuickBooks Desktop ProAdvisor
  • Certified QuickBooks Point-of-Sale ProAdvisor
  • Certified QuickBooks Enterprise Solutions ProAdvisor

Getting Professional Help with Your QuickBooks® Software

If you use QuickBooks Online and are ready to get professional help with your software, please contact us. We will evaluate the health of your books, make a plan to stay on track, and provide a quote for consulting or training in QuickBooks based on your specific needs. 

How to Properly Track Payments for Forms1099-MISC and 1099-NEC Reporting

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It’s not uncommon for 1099-MISC and 1099-NEC preparation to be a frustrating experience for small businesses. The requirements can be complex and confusing, and if you don’t collect the necessary information as the year progresses, it will only add to your stress levels… and possibly result in penalties.

It does not have to be that way. Get things set up correctly in the beginning and follow best-practice procedures to ensure you’re not scrambling in January to get the information needed to file 1099s.

The guidance below is written below for organizations who use QuickBooks Online (QBO), but the concepts apply regardless of accounting software.

  1. Set up a vendor payment policy. Create and follow an accounting policy that essentially says you will not pay any domestic vendor (non-employee) for services, rents, gross proceeds paid to attorneys (such as settlements) or royalties* by cash, check or electronic funds transfer (EFT) until and unless they provide you a signed Form W-9 first.
  2. Don’t sweat it if paying with plastic or a payment network. Payments made by credit card, payment card or third-party payment network (such as PayPal), must be reported on Form 1099-K by the payment settlement entity (not by you). No Form W-9 needed.
  3. Follow the payment policy you just set up… really. It does no good to create the policy if you don’t follow through with it. “Mr. Contractor, you want to be paid in cash, by check or by EFT? No problem… after you’ve provided us a signed Form W-9.”
  4. Make it easy for your vendors to comply. Okay, filling out a paper Form W-9 and mailing or delivering it to you isn’t that hard, but that smells like procrastination bait for sure. Here’s how you can make it easier for your vendor:
    • In QBO, check the “Track payments for 1099” box on the vendor’s record.
    • Then go to Payroll>Contractors and click the vendor name.
    • Then choose the option to “email your contractor to complete their profile.” Your vendor will be able to provide all information directly online.
  5. When you get the W-9, update the vendor record. The completed Form W-9 will specify what type of entity your vendor is.
    •  For each vendor that is not a corporation, make sure the “Track payments for 1099” box on the vendor’s record is checked.
    • For each vendor that is a corporation and does not provide legal services, make sure the “Track payments for 1099” box on the vendor’s record is NOT checked.
    • For each provider of legal services, make sure the “Track payments for 1099” box on the vendor’s record is checked. It doesn’t matter if the provider is a corporation or not.
    • There are a few other exceptions for which a 1099 tracking should be turned on for corporations, but those are less common. See the 1099 instructions for details.
  6. Use correct categorization on payments. Using the correct category helps ensure accurate 1099’s. Use separate expense categories for nonemployee compensation, rents, legal fees, gross proceeds paid to attorneys (such as settlements) and royalties*. These should each be mapped to different boxes on 1099 forms.
  7. Don’t ignore backup withholding requirements. If the vendor does not provide you a Form W-9, or if the form indicates the vendor is subject to backup withholding, then you must withhold federal income tax from most payments to the vendor.
    • The portion of the payment that is for backup withholding should be coded to a liability account set up specifically for 1099-MISC or 1099-NEC withholding.
    • You must remit amounts withheld to the IRS and file Form 945.

Questions? Need help processing 1099-MISC or 1099-NEC forms? Don’t hesitate to reach out to us!

*There are additional types of payments that are reportable on Form 1099-MISC or Form 1099-NEC not covered in this document and not common to SSCPA clients. Please review the 1099 instructions to see if any of those apply to you.

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