Top 5 Accounting Questions You Didn’t Know to Ask

June 10, 2020 | Article

Accounting is critical to your organization’s success. It can also be confusing. It’s important to not only understand the basics, but also have a solid game plan to ensure your accounting is up to date, accurate and gives you the information you need to make strategic business decisions.

We broke down what you need to know about the basics of accounting.

While most understand the importance of accounting, some may not even know where to start. We’ve developed a list of top accounting questions we’ve received when it comes to accounting matters.

1. What are the different types of financial roles in an organization?
The people on your accounting team are the frontline when it comes to providing critical financial information for your organization. Each of the following roles has a special skill set and way of thinking that contributes to the overall success of your organization.

CFO
A Chief Financial Officer (CFO) is your top-level financial person. A CFO is responsible for oversight of your finances as well as business strategy. A CFO helps you map out your long-term growth and eventual exit. They help you see the big picture for your organization while also supervising the financial duties.

CFO duties include:

  • Overseeing the administrative accounting functions/processes to ensure they are running smoothly.
  • Providing management with the information they need to make decisions surrounding investments, purchases, next steps and so on.
  • Helping to interpret your organization’s financial information in a meaningful way. A CFO not only presents you with the financial portion of your business, but also helps you see why it matters and the impact it will have.
  • Guiding your business toward strategic growth and identifying areas of improvement as well as threats.

The role of a CFO is big-picture thinking, and a large portion of their job focuses on strategy. A CFO understands your business and its strengths/weaknesses as well as how to leverage those strengths and improve those weaknesses to achieve what you’ve set out to accomplish. They are not, however, responsible for the day-to-day tasks related to your financial work—that falls to a controller.

Controller vs. CFO
A controller in the accounting function of an organization is the person responsible for supervising the day-to-day task-related financial work. The role of a financial controller is to manage the company’s finances and ensure their timeliness and accuracy. Controllers also have responsibility for the accounting department team.

Responsibilities of a controller will include:

  • Accounting system setup and maintenance
  • Financial statement preparation and reporting
  • Bank and credit statement reconciliation
  • Accounting staff, including supervision and training
  • Budgeting
  • Procedure documentation
  • Payroll
  • Accounts payable and receivable
  • General ledger maintenance
  • Tax compliance

The controller is the gatekeeper of the financial information, bridging the gap between data entry and strategy.

As you can see, CFOs are higher-level strategic thinkers who oversee not just your financial information, but also how it broadly applies across your business. A controller, on the other hand, manages the day-to-day financial tasks that make up your accounting strategy. They will also oversee any accounting staff, such as bookkeepers, and ensure your records are accurate and timely.

Each of these roles has a specific purpose within your organization. Each also comes with a specific skill set. Depending on your size of business, however, the price tag associated with these roles (and possibly more) can seem overwhelming.

The good news is that not all of these individuals have to be actual employees of your organization. There are outsourced CFO, controller and even bookkeeping services available. In fact, outsourcing accounting and bookkeeping can give your organization more time to focus on efficiencies and what they do best.

Controller vs. CFO: Which do you need?
As you can see, CFOs are higher-level strategic thinkers who oversee not just your financial information, but also how it broadly applies across your business. A controller, on the other hand, manages the day-to-day financial tasks that make up your accounting strategy. They will also oversee any accounting staff, such as bookkeepers, and ensure your records are accurate and timely.

Each of these roles has a specific purpose within your organization. Each also comes with a specific skill set. Depending on your size of business, however, the price tag associated with these roles (and possibly more) can seem overwhelming.

The good news is that not all of these individuals have to be actual employees of your organization. There are outsourced CFO, controller and even bookkeeping services available. In fact, outsourcing accounting and bookkeeping can give your organization more time to focus on efficiencies and what they do best.

Bookkeeper
A bookkeeper’s responsibilities center around completing the day-to-day accounting and financial work. This includes:

  • Everyday business transaction processing
  • Task related reporting (such as sales tax, payroll, etc.)
  • Maintenance of supporting documentation (such as invoices, bills, receipts, Form W-9s, exemption certificates, credit applications, etc.)

A bookkeeper is like a storehouse of information about your business. They know things like chart of accounts, procedures related to functions such as accounts payable and receivable, how to maintain invoices and more. They are not, however, expected to make strategic business decisions based on this information.

2. Can I mix business and personal expenses?
If you are mixing business and personal expenses, you could land in a heap of trouble with the IRS if you aren’t accounting for the expenses properly. You also need to ensure proper supporting documentation for your business expenses.

The IRS defines business expenses as ordinary and necessary costs of carrying on your trade or business. If you pay personal expenses with your business account and categorize them as business expenses, you are reducing your taxable income by the amount of those personal expenses. Therefore, you are improperly reducing your tax liability, resulting in remitting the incorrect tax payment.

On the flipside, you can also be missing legitimate business expenses by paying with your personal account.

 

In this video, Selina Hansen, Business Outsourcing and Strategy Manager, discusses one thing business owners should know to help manage the financial side of their business.

3. How does bartering work with my accounting records?
Bartering (also known as trading), is the act of exchanging goods or services for other goods or services without money.

 

Accounting rules require you to capture all business transactions (including noncash transactions, like bartering) in your financial data.

We suggest setting up a bartering clearing account in your chart of accounts. Here’s an example:

First, you would invoice the customer (to record the revenue) and issue a credit memo.

Accounts Receivable $250
Service Revenue $250

Bartering Clearing Account $250
Accounts Receivable $250

Then, as you use the gift card, you would record the respective expense(s).
Meals & Entertainment $75
Bartering Clearing Account $75

If your system does not allow you to bypass entering a bill for an expense, enter the bill and issue a vendor credit.
Meals & Entertainment $75
Accounts Payable $75

Accounts Payable $75
Bartering Clearing Account $75

Once the gift card is used, the bartering clearing account should net to zero. The key to accounting for bartering is making sure you still record the income earned and expenses incurred. And remember to keep your receipts.

4. How long do I need to keep accounting documents?
The answer is that it depends. Different laws and regulations require certain documents be retained by a business or individual for varying lengths of time. For example, you may be audited by the IRS with respect to your federal tax return several years after you file it. Or you may be under an employment audit with the Fair Labor Standards Act (FSLA) or the Occupational Safety and Health Administration (OSHA).

 

Not only are records required for federal agencies, but they’re also required for state agencies like state unemployment or workers compensation. Other things to consider include bank documentation or vendor and customer correspondence to verify receipt/payment or contracts with respect to contract breeches or suits brought against you or an employee acting on your behalf.

The period of limitations for income tax returns is generally three years, according to the IRS. This means you keep the records for three years after the date of filing the tax return or two years from the date you paid your tax amount, whichever is later.

Special situations apply, though:

  • If you file a claim for a loss from worthless securities or a bad debt deduction, the IRS recommends you keep the return and documentation for seven years.
  • If you somehow did not report income that you should report and it is more than 25% of the gross income on your return, you should keep records for six years.
  • If you never file a return, you should keep the records forever—there is no limitation if nothing is filed.
  • Keep your records indefinitely if you have ever filed a fraudulent return.

5. What do you need to keep as part of your document retention?
Items the IRS may expect to see include:

  • Bank statements and reconciliations
  • Accounts receivable records and invoices
  • Accounts payable records and payments
  • Support for tax payments (federal, state, local)
  • Support for deductions taken on return
  • Mileage records
  • Chart of accounts and general ledger files, as applicable

If you purchase things like real estate or stocks, be sure to keep those records around until you sell the item to prove your basis. Then, retain the documents for the three years mentioned above once you file your tax return with the sale included.

For employment documents, the IRS recommends you keep tax records for at least four years after the date the tax is due or paid, whichever is later.

Some documents should be kept forever. A few of those include deeds, minutes of meetings, tax returns, financial statements, legal records and corporate documents.

Other regulatory agencies will require certain specific documents that are not required on your tax return. For example, if you get audited by a state employment agency, they might require time cards. Time cards are not a requirement from the IRS for tax return filings—just the payroll records and reports.

A good practice is to keep records for seven years and have a good system in place so you can easily see what records can be destroyed after that timeframe. This would not include the items you should keep forever, so keep those items in mind as you review your documents.

Accounting can be confusing. Outsourcing it allows you to focus and move forward with confidence.

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