Accounting for Business Owners and Entrepreneurs | Larry Aiello | Skillshare

Accounting for Business Owners and Entrepreneurs

Larry Aiello

Accounting for Business Owners and Entrepreneurs

Larry Aiello

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18 Lessons (1h 9m)
    • 1. Skillshare Accounting course promo

      1:29
    • 2. Accounting and its Importance to your Organization

      3:16
    • 3. The Accounting Equation Made Simple

      3:44
    • 4. Double Entry Accounting

      4:19
    • 5. Cash vs Accrual Basis of Accounting

      5:59
    • 6. Choosing Cash Method vs Accrual Method of Accounting

      3:09
    • 7. Best Practices in Accounting for Your Business

      4:02
    • 8. Tax Considerations by Entity

      5:48
    • 9. Break Even Analysis

      5:05
    • 10. Bank Accounts

      2:51
    • 11. Chart of Accounts

      3:28
    • 12. Financial Statement - Balance Sheet

      3:53
    • 13. Financial Statement - Income Statement

      4:16
    • 14. Financial Statement - Statement Cash Flows

      3:48
    • 15. Financial Statement - Statement of Retained Earnings

      3:28
    • 16. Hiring Professionals

      4:46
    • 17. Payroll Service Company - Is it Proper for Your Business?

      3:00
    • 18. Hiring Tax Professionals

      3:00
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About This Class

Do you want to get a grasp of the accounting functions for your business or new startup?  Are you confused about where to start and what you need to know?  Are you the type of person that feels intimidated by the topic because you don't like math or you are not a "numbers person"? Well you are not alone. 

In this course I will teach you:

  • The basics of accounting in easy-to-understand terms designed for the small business person.

  • What you can and should outsource for your business?

  • When it makes sense to hire your own bookkeeping or accounting staff?

Financial Statements that are Typical for Business Success

We will also look at the main financial statements that businesses typically use and how they can help you monitor the performance of your business.   These financial statements are like the instrument panel on a vehicle that can help you understand where you've been and where your business is heading.

I have 30 years of accounting experience and I've helped other entrepreneurs get their accounting set up properly and explained everything in simple terms for the layperson to understand.  And I can help you too! 

Sign up for the course and get started today. 

Meet Your Teacher

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Larry Aiello

Teacher

Hello, my name is Larry Aiello and I am an accounting professional with 30 years accounting experience and a graduate of the University of Florida.

My experience covers a wide variety of industries including real estate, healthcare, financial services and doing a lot of different tasks related to the business world. And I’m also a big geek in figuring out how the computer can improve our lives.

I really enjoy teaching and sharing my knowledge with others no matter what the subject matter.

I grew up speaking Italian at home and developed a love for the Italian language at a very young age as we would travel back-and-forth every year to visit my family and friends. Early on I realized that knowing another language is indeed a gift. It allows you to have relation... See full profile

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Transcripts

1. Skillshare Accounting course promo: Hi, this is Larry Aiello. Welcome to my course on accounting. Are you a business owner that s struggling to see how the accounting function fits into your organization? Perhaps you are starting a business, and you are confused with what you need to know about accounting and its importance and how it fits into your overall vision that you have for your company. You might be like a lot of people that dread the thought of accounting because you don't like dealing with numbers and a lot of math. Well, you are not alone. So what I want to do in this course is to clarify and simplify what you need to focus on as a business owner and empower you with the knowledge that will help you communicate better with your lenders, potential business partners, tax professionals, employees and any others that are relying on the success of your business. That way, you're not embarrassed and feel like an idiot when you are conversing about one of the most important aspect of your operations, and that is its finances. In this course, we will look at the main financial statements that most companies use to measure their performance and to help them make better business decisions. I'll explain it all. In layman's terms, with my 30 years of accounting experience working in industries such as real estate, healthcare and financial services, and helping other entrepreneurs like yourself, I can help give you the knowledge and insights that you need to help guide your business forward. So let's get started today and I'll see you inside the course. 2. Accounting and its Importance to your Organization: good day and welcome. So when this lesson we will look at the function of accounting, what is accounting and why is it so important anyway? My objective in this course is to break down the accounting function of a business at its most basic level, which is to keep score about how a business is performing. You can think of it similar to the standings that you look out for your favorite football or basketball team. Ultimately, their bottom line is wins and losses, and that is how they determine who gets into the playoffs for business. Their bottom line is in that income. And of course, you have to also look at your cash flows to determine if a business will succeed or not. I also want to help the business owner learn a little bit of the lingo, so you're not intimidated or feel like an idiot. When you speak to your accountant and having a good grasp of the accounting and the numbers will better the odds of your business being successful. Many people get intimidated by the subject, thinking that it is complicated math and that you need to be an Einstein or rocket. Scientists to figure it out, but I'm here to tell you that the math is not that complicated. All the math you learned in eighth grade is good enough for you to get a grasp of the accounting for your business. You could think of accounting is basically three steps number one to capture and record financial information properly. Number two summarized the financial information into useful information, and then number three. Digest that information or use that information for decision making. It's funny the power of tracking numbers and that is what accounting forces you to do. The same is wanting to lose weight. If you start tracking your weight in a notebook every week or blackboard on your phone or even your refrigerator, whatever. Over time you will more than likely not all the time, but probably start losing weight. It will seep into your subconscious, and you will have better odds of success than not writing it down. And the business owner can't make any changes to improve his or her business unless they have accurate and useful information without it is like driving a car with no lights on at night. So here are some of the benefits of having a good accounting system. Number one. It helps you keep accurate records. Number two, it tells you. Have the businesses performing. Number three will help you make better decisions. Whether you can increase prices, decrease costs etcetera. Number four. It provides a history of the camp of the company where it's been and where it potentially could be going and number five. It helps with reporting for tax purposes. It will give information to your lenders, your to your investors or potential investors, etcetera. Understanding the metrics and financial statements of your business is like understanding the metrics and GPS of your automobile. They can help you make adjustments so you can get where you want to go. So hopefully you realize the importance of having some key metrics for your business. Otherwise, you probably wouldn't be listening to me right now, so let's continue on to the next lessons so I can make it as clear as possible for the layman toe. Understand? If at any time you have questions or comments, please leave them in the discussion board and I will answer them. Thank you 3. The Accounting Equation Made Simple: Hello and welcome back. This is Larry Aiello. So in this lesson, we will go over the basic accounting formula. So so many people think that with accounting, there is a lot of complicated math involved and super duper formulas that you need to be, Ah, rocket scientist or ah, Math Wiz kid To figure it all out. Perhaps a bunch of super computers and need to be an Einstein or what have you? Well, I'm here to tell you that nothing can be further from the truth. All the math that you ever learned in the seventh or eighth grade will be all that you I need to know for accounting purposes that will pertain to your business. The basic accounting formula that drives all accounting theory is based on this one, that we will learn that only use a simple addition and subtraction. So the components of the formula are basically three major components of businesses value, and it even works for your personal finances. When figuring out your net worth. The formula consist of assets. These are items that you own. It could be stocks, bonds, houses, your jet skis, coin collection, etcetera. The next component is liabilities. These are items that you owe money on. For example, your mortgage or your credit card debt, and the final component is equity. That is the amount left over or your so called skin in the game. So the formula breaks down toe assets minus liabilities equals equity or owners equity. You could think of the logic from a liquidation standpoint. If you were going to stop operating your business, they would sell off your assets for cash. They would pay off all your liabilities to your dead oars, and whatever's left over will be paid to you or the owners in business to debt holders have priority over the equity owners. So let's illustrate this concept with a simple everyday example from personal finance. We will look at Tom, whose only asset is his house. Tom's house is worth $100,000. He put 20,000 down as a down payment to qualify for a convention alone. Therefore, he has a mortgage or a debt or an obligation of $80,000 with his mortgage company using our formula, the asset is $100,000. Liability is $80,000 due to the lender, so the equity is $20,000 a down payment or a skin in the game. So we take 100 1000 minus the 80,000 leaves $20,000 equity. We can also shift the formula around and make it like this. Assets equals liabilities, plus equity or 100,000 on the left side equals 80 1000 plus 20,000 on the right side. So once you learn this basic formula, this will form the building block for the rest of the accounting theory that we will learn in this course. This formula is a mathematical law. It is not a theory. It is always, always, always true. There are a couple of other formulas that we will learn in future lessons where we go over the financial statements that will tie everything altogether. But for now, always remember that act sets equals liabilities plus equity. So we will continue forward in the next lesson. Thank you. 4. Double Entry Accounting: welcome back. So in this lesson, I will introduce the concept of double entry accounting every company today that keeps track of their accounting books and their records. No matter what software they utilize, use a system known as double entry accounting. Some historians disagree on the origin of the general consensus is that the system was invented or formulated by an Italian during the Renaissance by the name of Lucca Poggioli. They used the system to help assist the Venetian merchants by keeping their accounting records straight. The system is based on the accounting equation, which we learned in a previous lesson. So let's review that lesson. The lesson is, assets equals liabilities, plus Owner's equity. In order for this equation toe always balance. A two sided entry must be recorded for every single business transaction. Most people operate by a single sided entry when they are keeping their checkbooks writing in the checks that they wrote, which would decrease their bank balance or the deposits that they made into their bank account, which would of course, increase the bank balance. But in reality, from an accounting standpoint, there are two sides of every transaction in order to keep our basic accounting equation and balance. And to do that, they came up with a system of debits and credits. If you think of a two column ledger, you can picture the debits as the left side of an account and the credits as the right side of the account. Every transaction can be recorded in what is known as a journal entry, where the debits and credits will equal each other so that the accounting equation stays in balance. So here are some rules of thumb. You don't necessarily have to memorize these per se as a business owner, but they will be good to know. Debits will increase asset accounts. Credits will decrease asset accounts. Debits will decrease liability accounts. Credits will increase liability accounts. Debits will decrease equity accounts and credits will increase equity accounts. These are easy to remember. If you know the basic accounting formula of assets equals liabilities plus equity, with the assets being on the left and the liabilities and equities being on the right, let's take a look at an example of a simple balance sheet for a restaurant. Frank has 50,000 cash on hand but needs to buy some new restaurant equipment for $10,000. He is going to use some of his cash for this transaction. The journal entry would be debit equipment and asset for the $10,000 he will credit cash and also an asset. It would decrease that balance by $10,000 so everything will still remain in balance with the accounting equation. However, more than likely Frank will take out some type of loan for the equipment purchase, and the entry then becomes debit equipment and asset $10,000. But he'll credit loans payable to a finance company or a liability liability, and we can also see that the accounting equation will still work. So what is the take away from all this? Do you really need to memorize that a debit will increase in asset account or credit will decrease an asset account? Not really. As a business owner just realized that your accounting system or software whether you use QuickBooks or something else will help keep everything in balance. It may look like you are only recording one side of a transaction, for example, receiving a deposit from a customer. But in the background the system is handling both sides of the transactions and performing double entry accounting and forcing the system to perform as intended. And that will wrap up our lesson on double entry accounting. If you have any questions, please leave them in the discussion board. Otherwise, I'll see you in the next lesson. Thank you. 5. Cash vs Accrual Basis of Accounting: Good day. This is Larry Aiello. Welcome back. In this lesson, we will go over to different ways of recording your accounting activity that are both acceptable under accounting practice. In certain circumstances, However, per iris guidelines and generally accepted accounting principles ie gap, there are times when you must use a cruel based accounting that will be the topic of another lesson. So in accounting practice, there are two basic ways you can run your books and report your accounting records. First method is the cash method, which pretty much will mirror what is happening in your bank Account. Revenue was recorded when money comes in the door and expenses are recorded when the money goes out the door. The other method is what is known as the cruel method, based more on the legal principles of when revenues are earned and expenses are incurred as opposed to the cash that results from these transactions. It would be best to illustrate the differences by using examples. So Vinnie runs a Vape shop in any town U. S. A. And is renting some space on 123 Main Street. His landlord requires that he pays three months of rent in advance every quarter. So in January 1, he pays January, February and March rent on April 1st. He will pay April, May, July, April, May, June and so on. So is Rent is $1000 per month. Under the cash method, Vinnie would record rent expense Onley in January, April, July and October of $3000 per month. This would obviously lead to huge swings and profitability for Vinny's business. If you were looking at the financial statements under the accrual method, Vinnie would show $1000 per month rent every month of the year. This is more in line with the economic performance of his shop and will keep things more consistent and easier to evaluate the results of his business. The way Vinnie can't convert his numbers from cash basis to in a cool basis would be by the use of journal entries that either he or more than likely his accountant will perform on his accounting software, like QuickBooks or some other programs. So the illustrate on January 1, when he pays his rent, his entry will be he will debit prepaid rent, which will be an asset on his balance sheet. He will credit his cash account, also an asset, so the balance will go down at the end of January, he will have incurred one month of rent expense. So his entry so this entry will need to be done. Debit, rent, expense and credit. Prepaid rent for $1000 each. And at the end of January, the prepaid rent account will only have $2000 balance remaining instead of 3000. And at the end of February he will record the same entry, leaving $1000 in the prepaid rent account. And then, at the end of March will be another entry, leaving a prepaid rent asset account of zero. Then, on April 1, the cycle will repeat itself. Let's look at another example with money coming in the door or a revenue situation. Mark is a mobile APP developer. He requires a 50% deposit before he starts working on an APP for his client. He charges ABC Restaurant $1000 to build their app and takes in a $500 deposit on May 25th . The APP is completed and delivered a month later, on June 25th. Under the cash method, Marc Records revenue in May and June of $500 each when he is paid by the restaurant. Under the accrual method, all the revenue is recorded in June. When the APP is completed in May, he would record this entry debit cash for 500 credit unearned revenue a liability because it still has to make the APP. The dollar theme amount of the credit is $500 for that entry than in June. He receives the rest of the payment for 500. He will debit cash for that money coming in and asset account credit revenue for 500. Then he will get rid of the unearned revenue by debuting that for 500 and crediting revenue for $500. Here is a comparison of the financial statements. Under both methods, you can see that the revenue is recorded at different points in time. In the long run, it turns out the same. But in the interim there is a difference. So those were just too example. But there are many, many other similar situations where the accounting would be handled in the same manner. By making journal entries, we can have the financial statements reflect the performance of the business more accurately while eliminating some of the weaknesses of using the cash method. So to summarise again, the cash method records revenue and expenses. When cash changes hands, it is basically a mirror of your bank account. You're cool. Method recognizes revenue when it has earned, not necessarily when you receive the cash and it recognizes expenses when they are incurred , not necessarily when you paid the bill. So that will finish off this lesson on cash method versus a cruel method of accounting. You have any questions? Please leave them in the discussion board who continue on to the next lesson. Thank you. 6. Choosing Cash Method vs Accrual Method of Accounting: Okay, Welcome back. This is Larry Aiello. So we are continuing on from the previous lesson where we discussed cash versus a cruel So in this lesson, we will go over choosing the right method. So one of the first things that you need to decide with with your accountant is whether you'll be running your books on the cash basis versus the accrual basis of accounting. They're even hybrid method that I take a combination of both methods that you can employ for certain aspects of your business that include inventory as we saw previously. The timing of cash receipts and dispersement are different under both methods, so that will impact when you pay your taxes to the ire s. If you're here in the United States or whatever taxing authority is applicability for you. Once you choose a method, you are required to stick with it. If you do want to change methods, you will have to file for form the iris, form 31 15 and get approval from the I. R. S. Personally, I don't like to get on their radar, so give it some thought in the beginning and choose the right method for your business from the get go. Most large businesses will use the accrual basis. They prefer it because it is more accurate, although it is tougher and more costly to maintain. Small businesses and sole proprietors can use either method, but most will choose the cash basis because of its simplicity. With that method, you are basically tracking the activity on your bank statement. However, the IRS requires you to use the accrual method of accounting if following, if any of the following situations apply to your company. Number one. If you are a C Corp or a publicly traded company, you have to use the equal method Number two if you are a partnership and one of the partnerships is A C Corp and you also must use it cruel. Number three. If you gross revenues are over $5 million per year, you must use cruel method and number four if you carry inventory and your sales are over a $1,000,000 per year. If your inventory is only a small portion of your business than you could use the hybrid method, you can run everything else on cash, but have your inventory on an accrual basis. If your receipts are under a $1,000,000 you are not required to use the accrual basis of accounting. You could use the cash method if you carrying inventory. If your plans include getting loans from banks or bringing in money from investors, they will probably require you to present cruel based accounting numbers. That is what they're used to seeing. That is what they're most comfortable with. In that case, you can still keep your books on a cash basis, but have an accountant prepare a cool based statements for your lenders and investors. The accountant will take a look at your current books will ask you for some additional information, make a few journal entries and then LA They can provide you with the A cool based So that will conclude this lesson on choosing the proper method for your company when we will continue on in the next lesson. Thank you 7. Best Practices in Accounting for Your Business: Okay. Welcome back. This is Larry Aiello. So here are some best accounting practices that you can follow. If you are a business owner, number one. Try to keep your personal expenses separate from your business expenses. It will make your life so much easier at tax time, and it will also help you truly evaluate how your business is performing. Even if you are a so proprietor, you can set up a separate checking account for your business and also use a separate credit card for your business. The credit card could be in your own name, but just have one for business and one for personal. Perhaps you have used a MasterCard for your business expenses and then use the visa for your personal expenses. If you are not a sole proprietor and do set up a business entity than get a credit card in the business entities name if you can. If you do pay any personal expenses from the business account, treat it as a distribution of equity or set it up as alone that you will pay back quickly. And if you pump in any funds or other assets, keep track of that, too, as that will be a contribution to the business. Number two. Get yourself set up with a tax identification number or what is known as a federal I D. Number. You can even do this if you are a sole proprietor, so you don't have to use your Social Security number for identification purposes. Number three. If you are entertaining clients, potential clients, employees over dinner, sporting events, etcetera, then you need to document who you were with and what was the business purpose. Make sure you keep receipts of all transactions, especially for expenses over $25. Remember when it comes to taxes If you ever get audited, the burden of proof is on you to prove that you are allowed to take a business deduction for an expense. And in order for an expense to be deductible, it must be ordinary in the course of your business, and it must be necessary. You should keep your receipts for a minimum of three years. You can set up a filing cabinet, or keeping scanned copies is perfectly acceptable. Number four. Keep track of any cash transactions for money coming in, and any expenses that you pay could do this in the notebook around a spreadsheet or accounting software. If you wish. Number five. Keep track of any mileage. If you are using an automobile for business purposes, this would be common for Realtors, insurance agents or anyone else sales oriented, for example, that is on the road a lot for business purposes. Number six. If you spend money on big ticket items like assets, vehicles, furniture, real estate, etcetera. Keep those receipts in a separate file and point them out to your accountant so he can depreciate them properly on your tax returns. Number seven. Set up a good functional accounting system where you can keep track of everything and be organized. Let me say it again. Be organized. You're just starting out. You can even do it in a notebook if you want, but keep good records. I can even do it yourself with some online virgins of QuickBooks or wave accounting, where you can connect to your bank account credit card account PayPal account. If you use that for your business and it will pull in all the transactions into a cloud based software system after the transactions get categorized, you can print your standard accounting reports get with a good accountant to determine what your needs are and what options may be best for you and your company. So that will wrap up this lesson on best accounting practices for your business. If you have any questions, please leave them in the discussion board and we will continue on to the next lesson. Thank you. 8. Tax Considerations by Entity: good day and welcome back. So in this lesson, we will go over the topic of taxation, which is one that most people will cringe at. But anyway, I will try to make it as simple and painless as possible. So naturally, as a business owner, you not only want to need to concern yourself with the day to day operations of the business and trying to maximize its profits, but you also want to minimize its expenses. One of the big expense items of most businesses can be taxes that you owe to Uncle Sam. Assuming you are operating here in the United States, the business entity that you choose during your startup phase of your business will have huge implications on the taxes that you pay. Setting it up incorrectly can cost you thousands of dollars in the long run. You could make changes if you make a mistake, but it will be costly. That's why it's important to get yourself a good accountant prior to choosing a business entity structure to get it right from the beginning. Okay, so we'll go over some of the business structure that you can choose the business entity types and the easiest type is a sole proprietor. This is the most easiest business to form, and it's also the most common. The advantages are that the administrative burdens are few with this type of business. The disadvantage is that you become personally liable for any debts of the business for tax purposes. All you need to do is to file a form 10 40 which you are probably already filing now than at a Schedule C for your business activity, along with a Schedule SC for the self employment taxes. What are self employment taxes? Well, if you're working for an employer, taxes that are deducted from your paycheck that pertained to Medicare and social Security are also shared by your employer. So you contribute 7.65% and your employer kicks in 7.65%. But as a sole proprietor, you are now the employer, so you not only have to pay what you are paying before, but you also have to play pay the employer portion as well, so that means you are now responsible for the total 15.3%. The next business structure is a partnership. Before my partnership with someone in essence, it is tax the same way as a sole proprietor, except that uses a form 10 65 and then it will distribute a K one to each of the partners. So let's say each one is a 50 50 owner and you make $10,000 1 partner is going to get a $5000 K 1 and the other partner is going to make a get a $5000 K 1 and that K one information of the profits or lost will flow onto each individual's 10 40 tax return. The next business structure is a C corporation with a C corporation, you will have double taxation. The corporation will be tax on its profits and then the shareholders get taxed when they receive dividends from the corporation Corporation will file a form 11 20. Next type is An S corporation. S Corp is a popular form of business set up in that many of the same advantages of a C corporation exists, but it does not have the issue of double taxation. The income has passed directly to the shareholders and this tax as their individual tax rate, An s corporation will file a form 11 20 s. The next type of entity is called a Limited Liability Corp L L. C. This is another entity set up that avoids the issue of double taxation that you have with a C corporation and depending on how many people form your LLC will determine how it is taxed . If one person forms an LLC, that income will flow through to your individual 10 40 tax return. If it is set up with multiple members, then you have a choice to be taxed as a partnership using Form 10 65 or as a C Corp using Form 11 20. Thus, it would be double taxed as if you were to go this route. So after you get your entity set up, you need to keep in mind that once you become profitable, you will need to start making payments on a quarterly basis to the Internal Revenue Service for your federal income tax liability and depending on what state you live in, you may also have to do this at the state level as well. If you have been an employee for any length of time, you know that your employer takes out federal income taxes, along with any state taxes and local taxes. That may be due to your taxing authority. If you get paid once a week, they take out taxes on your behalf once a week. But as a business owner, you will need to pay an estimate of these taxes every quarter to get with a good accountant to come up with a good estimate. So you don't find yourself in a situation where you will be short and no taxes, along with a penalty and those air taxes that are due for the business entity on its profits. Keep in mind if you are paying employees every week and taking out taxes from them on their behalf every week, then you need to be remitting those taxes to the taxing agency every week. The due dates for these estimated tax payments to the I. R. S, by the way, is April 15th June 15th September 15th and January 15th of the following tax year. So that will wrap up the lesson on tax considerations for your business, and we will continue on word in the next lesson. Thanks for joining me today. 9. Break Even Analysis: Okay. Welcome back. This is Larry Aiello. So in this lesson, we will look at break even analysis. So if you're starting out a new business, one of the most beneficial accounting exercises you should do is to perform a break even analysis so you could determine at what point the business will become profitable or where your revenues will exceed your expenses. This is a concept studied in cost accounting. Perhaps you are working with an accountant, and he or she will go over this with you or should go over this with you, or you can even calculate it yourself. The formula is not that hard. In fact, I will attach a spreadsheet and excel where you can fill out your assumptions, and it will calculate the break even point for you. But in order to calculate your break even point, you need to understand the difference between a fixed cost and a variable cost. Variable costs are costs that change when the level of your production changes. Fixed costs are costs that do not change with the level of production. The best way to illustrate this is with an example. Let's say you are opening up a microbrewery selling beer. The variable costs of this business will be the cost to produce the beer, such as the yeast grant, green hops and water. Let's say all these materials cost a dollar to make 16 pack of beer. As your production increases, let's say you're making 26 packs than your costs will be. $2 1006 packs produced will be $1000 to produce the beard. The fixed costs, on the other hand, will stay the same no matter how many beers you produce. But let me add a little caveat to a certain degree. Fixed costs are items such as rent insurance, leasing the tanks, the equipment etcetera, which are undoubtedly expensive. I'm sure the labor that you pay to produce the beer and advertising is another example of a fixed cost. Whether you produce 16 pack or 1000 your rent will stay the same. So your insurance, the tanks that you are leasing, etcetera. So let's just say it costs you $10,000 a month to run your operation in fixed costs. So then the question will become how many six packs do you need to sell to break even you know you have to sell them higher than a dollar to cover your variable costs. You have to cover your fixed costs as well. Let's say you know you can sell this micro beer for $9 per six packs that we use that as our example. $9 for 16. This will help us come up with one piece of the formula called a contribution margin or your revenue minus your variable costs. In this case, we have a contribution margin of $8 per six pack, $9 minus $1 of variable costs. If we take our fixed costs of 10,000 and divide that by $8 per unit, her six pack, we will need to sell 1256 packs to break even. Here is what it looks like graphically. If you sell any amount above the 1256 packs, then you will be profitable. Anything less, you'll be operating at a loss. You can see the number of units on the bottom, and as you move more to the right, you will be making more profit. And as you move down to the left, you will be making less profit and all the way to the left. You'll be at a loss until you reach that break even point. So previously I threw in a caveat about fixed costs. Keep in mind a lot of fixed costs are not really fixed. If your production increases dramatically, they will often step up to a new level. For example, that 10,000 month and fixed costs only had one employee making beer, but he could produce up to twenty five hundred six packs a month. And after that you have to hire another beer producer so your labor costs will step up accordingly. You may also have to lease another tank, which would cause your fixed costs to step upwards as well. After a certain point, let's say you produce 20,006 packs a month. You may need to even rent out another location. Keep that in mind. Your fixed costs in the long run are not really truly fixed. They can step up and they often do step up as your level of production will go up. So that will wrap up the lesson on break even analysis. The big challenge is knowing what is fixed versus your variable costs. Sometimes it will not be so obvious, or it could be more of like a hybrid cost. But the important thing is to start tracking it, make your assumptions, and over time you can tweak things accordingly for more accuracy. Let's continue on. And the next lesson. Thanks for joining me. 10. Bank Accounts: Okay, Welcome back, This Larry Aiello. So in this lesson, we will look at the bank accounts that you need. After you've business gets set up with the appropriate tax I D. Number and you start generating revenues. Your next step should be to open up a bank account. This will help you keep track of all your business activity, and it will add legitimacy to your operation. Technically speaking, if you are operating as a sole proprietor, you don't necessarily have to set up another bank account for iris regulations. However, I would set one up anyway because it will help. You better ascertain how your business is performing, and number two will make your life so much easier at tax time for all other entities. You are required to keep your personal finances and business finances separate in another bank account. So how many accounts do you need? You probably can get by with one checking account. Some businesses, as they grow larger, keep a separate account for their payroll activity. But in most situations, I would say you start out with a checking account and then, as you build excess funds, use a money market account that would be a good place to try to build up excess reserves of 3 to 6 months of expenses. Ideally, you may also want a credit card if you can get one. Ideally, it will be at the same bank that you have your checking count so you can make transfers between the account if necessary. If you will be accepting credit cards on location, you will probably want to set up a merchant account. That is an account that allows you to accept credit card payments. There are other services that you can use like PayPal or square, where they give you a device that attaches to your phone or tablet to run the credit card transaction. Depending on your business, that may or may not be a viable option for you. Get with your bank. If you do want to get a merchant account and they can guide you in the right direction, you should shop around and look for a financial institution that has no or low fees. You should take into consideration their location and hours of operation and how convenient they would be for your business. Ask your family and friends for recommendations as well You should also check out your local credit union as they tend to be more customer focussed. I e focused on their members as opposed to the national banks that have their shareholders interest. First in mind, your bank or credit union will require identification to set up your account. If you are a so proprietor, they will need your Social Security number and two forms of I D. If you're A Corp, they'll also need your i. D. And they also want to see your articles of incorporation and your other corporate documents . So that will conclude our lesson on bank accounts. If you have any questions, please post them in the discussion board. We will continue on to the next lesson. Thank you. 11. Chart of Accounts: Okay. Welcome back. This is Larry Yellow. So in this lesson, we will go over a chart of accounts. This is one of the first things that you will do in your accounting system is set up a chart of accounts. Chart of accounts is basically listing of accounts that will be used for accounting purposes. In your business at a high level, you want to set up a tart of account for things that you want to and are required to keep track of. It is an index of all your financial accounts and will form the building blocks of your financial statements, and it helps you stay organized. Many times. A chart of accounts will be set up according to the industry that you are operating in tired of account for Jill's hair salon and Susan's hair salon will probably be very similar . You were starting out of business. You could do a Google search for chart of accounts for hair salons, for example, and see what pops up. And that should give you a starting point. Many accounting programs like QuickBooks, Peachtree or Wave Accounting will set you up with a sample chart of accounts. They often have some tailored for specific industries that you can start out with, or you can have an accountant or c p A. Help. You set one up. You want your chart of accounts to be flexible and to be able to accommodate any changes in your business needs. He had any new products or services, etcetera. But you also want to make sure that it stays consistent from year to year so you can easier easily evaluate your business over the course of time. You also don't want to go to the extreme where it becomes difficult to manage. The accounts are grouped by section to coincide with our basic accounting formula. On our normally something like this, the count in the thousands section might be for assets. 2000 will be for liabilities, 3000 will be for equity accounts, 4000 will be your revenue accounts, and 5000 will be your expenses. If you are a local bike shop, something like this might be fine for your revenue section. You can have sales, rode bikes and distinguish, haven't account for your mountain bikes and then have an account for your hybrid bikes. But something like this might be overkill. So this one, for example, you see an account for men's road bikes that are red. See one for men's road bikes that are green men's road bikes that are purple, etcetera. This would be overkill, so you want to keep it simple. I mean, if you're a multibillion dollar corporation selling bikes, this might be appropriate. But if you're a local bike shop, you know this would be overkill and and and would be hard to manage and just wouldn't wouldn't be in your best interests will keep it simple. Keep it, keep it detailed enough that it gives you information that you want. But you also want to keep it simple and don't overkill it. And also make sure you set up your chart of accounts properly from the beginning because it will be a pain in the rear to change it after the fact it can be done, but it is time consuming and a hassle. So get with a good accountant to help you with that, if necessary. So that will wrap up this discussion on setting up a chart of accounts for your business, and we will continue onward in the next lesson. Thank you 12. Financial Statement - Balance Sheet: good day and welcome back. This is Larry. I yellow on another lesson. So in this lesson will be the first of a few lessons describing the various financial statements that a company can use to evaluate how it is performing. Of course, there are other statements that can be prepared for various reasons, such as sales reports, vendor lists, purchases by vendor, etcetera. But I will only focus on the main financial statements, which are pretty standard. The first statement we will look at is the balance sheet balance sheet of a company is a snapshot of a moment in time that evaluates the health of a company. The date chosen is usually at the end of the month at the end of the quarter or at the end of the year. Example December 31. However, in theory, the end of any day can be chosen. Think of a balance sheet as a picture as opposed to a movie. It's a snapshot, a moment in time of your business. A good accountant can look at a balance sheet and discern the overall financial health of the company. When you compare current balance sheet to previous balance sheets that can give you an idea of where the company came from and where it is. Heading the balance sheet is the basic accounting formula that we learned earlier in the course when we learned that assets minus liabilities equals equity. We can display it like this, but very often you will see that the liabilities air flipped over to the right side. So the formula then becomes assets equals liability plus equities. That leads to a simple presentation of a balance sheet where the assets are on the left and the liabilities and equity are on the right side of a two column report. If you think back to our lesson on double entry accounting, the assets on the left side are increased by debits, and the liabilities and equities are on the right side, and they are increased by credits. Common protocol is to separate out your assets and liabilities into a current portion or short term portion. Those air item that are that can be quickly converted to cash within a year, and then the other section will be for items that are non current or long term generally items that can be converted to cash over a year. The items are usually listed in the order in which they can be converted to cash. This cash will be the first item on the balance sheet and then usually inventory what items such as buildings, which takes a lot to liquidate. Listed later, those would be in the non current section. The other item on the balance sheet that is of importance will be an item called retained earnings. This is the amount of profits that have been accumulated during the life of the business. Many people confuse this with a cash number, but it's not cash. If your bike shop makes $10,000 a year net profit the retained earnings after year one would be 10,000 after Year two. If the same thing happens, your retained earnings balance would be 20,000. And then in Year three, if you have the same thing happen again, if you make another 10,000 and $30,000 will be the amount of your retained earnings balance at the end of year three. That's assuming that there are no dividends to, you know, pay out any dividends. There is a financial statement that deal specifically with retained earnings in another lesson, and we will go over that in the future. But for now, that will wrap up the lesson on a company's balance sheet, and we will continue on in the next lesson. Thank you. 13. Financial Statement - Income Statement: Welcome back this Larry Aiello. So in this lesson, we will take a look at one of the financial statements called the Income Statement. The income statement is a financial statement that shows you have a company performed over a certain period of time, usually a month, 1/4 or a year. You could think of this like a movie of a business as opposed to the balance sheet, which is a picture or a snapshot of the business. This is sometimes referred to as a profit and loss statement or a P and L. It will list out the revenue items in the first section, and then it will be followed by the expenses. And then what is left over will be the income. Thus it is based on one of our accounting formulas of revenue minus expenses equals net income. You will often hear of that income being referred to as the bottom line. Some businesses will have a cost of goods sold section, and we'll deduct that from revenue to come up with a gross profit. For example, Tom sell bicycles and pays $100 each per bike, but sells them at $400 apiece if he sells 10 bikes for the month, his income statement would look like this. He would have sales of $4000 cost of good soul cost of the bikes of $1000 he would have a gross profit of $3000. So the cost of goods sold section pertains to businesses that sell merchandise, retail or even at a wholesale level, as opposed to service. Businesses will not have a cost of goods sold section. They may have a cost of services provided section, but not a cost of goods sold. Then, after the cost of goods sold section, you will see the other expenses of the company usually broken out in different sections. Then you will see operating expenses in the next section. These air costs that are related to the core business, such as rent applies and overhead. And then you will see non operating expenses in another section. These air costs not related to the core business and are usually interest, expense, gain or loss on any investments that the business maybe doing appreciation, etcetera. You may even see another section for extraordinary type items, things that are peculiar in nature and not a normal part of their operations. This could be damaged due to a on external event like a flood. Or a tornado could report a loss related to the sale of a business unit or cost involved in a lawsuit. Settlement. Etcetera, appreciation and taxes are other items that are sometimes reported in different sections. In essence, you are taking the same pie and presenting it in different sections or in a different manner. The highlight certain aspects of the business. If you follow the stock market, often times you will hear of a company's EBITDA earnings or earnings before interest, taxes, depreciation and amortization. E b i t d A. This is a figure that comes from the income statement, and it's stripping out all of the non operational expenses. Come up with a bottom line that gives you an accurate result of the operations on Lee. Sometimes you will hear the term comparative income statement that will show you to timeframes or even mawr that can help you make comparisons like this year versus last year , this year versus last year and two years ago, etcetera. Just like every other financial statement, the income statement doesn't tell the whole story. But it could tell you a good chunk of the story. A company can be profitable, but it can still go out of business. Depending on its cash flow. We will look at the cash flow statement in a future lesson. So that will finish off our discussion on the income statement. We will next look at the statement of retained earnings. Thank you for joining me today. 14. Financial Statement - Statement Cash Flows: Okay, Welcome back. This is Larry Aiello. So in this lesson, we will look at the final statement of the main ones that companies used to evaluate their operations, and that is known as the cash flow statement, or sometimes known as a statement of cash flows. This statement looks at the inflows and outflows of a business's cash and reports that reports that on its own separate statement, this is different than an income statement. Because sometimes there are timing differences between when cash is received versus when cash goes out the door. We learned in another lesson lesson the difference between a cruel and cash basis accounting. And that is why these changes are highlighted on another statement. Sometimes there are estimates that are used in items that make up the income statement but have no impact on the cash flow statement. In fact, many investors like to use the cash flow statement as opposed to an income statement to discern the results of a businesses operation. After all, there are assumptions and estimates that can skew the results of an income statement. But cash, on the other hand, is not so easy to fake. You can count it. And at the end of the day, you either have it or you don't. It is easily verifiable, and the cash flow statement will tell you what happened to it over the course of a month, a year, etcetera, and whether it went up and down and tell you why. The cash flow statement will look at inflows and outflows of cash and categorize them into three separate components or categories. Number one would look at the operating activities. This comes from the sale of goods or services payments to employees money from customers, etcetera number two. It will also separate him out into investing activities. This comes from the sale of purchases, sale or purchase of stocks or bonds. Real estate when you buy equipment when you buy trucks etcetera, so those are investing activities. Number three financing activities. This is money that comes from taking out loans, sale of company stock to investors paying dividends, paying back bank loans, etcetera. And there are a couple of ways you can prepare the statement of cash flows, either using a direct method or an indirect method. The direct method is easier to understand but harder to implement for large organizations. You take the cash flows from operating, investing and financing activity. Then you have your change in cash. The indirect method, which is more commonly use, starts out with net income, which companies track anyway. They take the net income from the income statement and then they back out the non cash items to leave you with the change in cash. But just remember, at the end of the day, the purpose of this statement is the highlight. Why cash changed and by how much. He started the year with 10,000 in your bank account. And then at the end of the year, you ended up with 15,000 in the account. We know there is a change. A good change of $5000 in cash went up $5000. The cash flow statement will tell us if this 5000 came from the operations of the business . Or perhaps you made a killing on selling cannabis stock and that whole 5000 came in from the sale of stock. Or perhaps you sold some equity to investors and brought in $5000 that way. So that will finish off the discussion on the statement of cash flows and conclude our lessons on the various financial statements used by organizations. Thank you very much. 15. Financial Statement - Statement of Retained Earnings: Welcome back. This is Larry Aiello. So in this lesson, we will take a look at the statement of retained earnings in a statement that shows you the changes of what happened to a company's retained earnings over a period of time. Retained earnings are the lifetime earnings of a business that have not yet been distributed as dividends. Many people think that dividends are an expense similar to a payroll item, but in fact, dividends act as a distribution of the company's equity. Thus, it is a balance sheet item. Have you ever seen a mutual fund? After they declare a dividend or stock? The price generally goes down because they're taking out some equity. That's the theory behind that. This is a statement that is not very commonly used because there are only a couple of transactions that impact. This statement becomes important if you are distributing dividends to shareholders, partners, owners, etcetera. If you are operating a business and you are the only owner or shareholder than the statement becomes irrelevant in your situation, but we will take a look at it anyway. Since the transactions are few that impact this statement, many companies prepare this statement on Lee when asked by their lenders or by potential business partners, etcetera. So this is a formula for retained earnings that will, in essence, be the retained earnings statement. You basically take your beginning retained earnings number you add in your net income for the time period, and then you take away. You subtract any dividends that you paid back to your owners, and then you have your ending retained earnings balance. Let's take a look at an example to make this more clear. Tom's bike business in his first year of business was a huge success. His retained earning statement would look like this is beginning. Retained earnings had a zero balance and he had a net income of $50,000 for the year. So he decides to pay $20,000 to his partners. So you take the zero of beginning balance, plus the 50 of what he made. He's taken out 20 to pay as partners, so he's he's ending up with a $30,000 retained earning balance for the end of the year. In Year two. He does even better and decides to increase his dividend, so he has 30,000 beginning and retained earnings. But let's say he makes $90,000 in that income and decides to pay $40,000 in dividends. That will even ending retained earnings balance of $80,000. So you can see that this retained earning statement serves as a bridge between the income statement and the balance sheet for a company information from the income statement i e. The net income. That's the only thing that will flow onto the retained earning statement, and the end result ends up on the balance sheet. It is also important to realize that the retained earnings is not the same as cash. Company can be using debt to finance his business and have a good retained earnings number , but can be operating with little cash. So that will finish off our discussion on the statement of retained earnings. If you have any questions, please leave them in the discussion board and we will continue on to the next statement. The cash flow statement In the next lesson. Thank you 16. Hiring Professionals: Okay, good day and welcome back. So in this lesson, we will look at hiring professionals what type of professional services you will need or your company from an accounting or bookkeeping in tax standpoint. So after you just started your company, you may not be sure what you need from an accounting or bookkeeping standpoint. You need to hire someone. Or perhaps there are things you can do yourself. So I give you my thoughts for the rest of this video. Initially, you should utilize the services of an accountant in the beginning toe. Help yourself in choosing proper business entity and getting it set up properly. A good accountant will look at your personal situation and choose the business structure where there is the sole proprietor, a partnership or Corp that will be optimal for your tax situation and the business that you are setting up. They can also help you get set up on an accounting system like QuickBooks. If you are small and starting out on your own, I would recommend a cloud based service that will sink up to your bank accounts and credit cards and any other accounts that you may use for your business like PayPal. I particularly like wave accounting as a cloud based solution. You can categorize the transaction yourself if you have the time and want to do it yourself . But if you dread it and you get three months behind than outsource this as quickly as possible, eventually you want to get to a point where you outsource your bookkeeping and then you can review the results on a monthly basis. That way, you could focus more on the revenue side of your business. You also need to determine if you will have day to day things that will need to be completed, such as billing customers, particularly if you are building out insurance companies like in the health care profession . You also want to make sure that they are. Your customers are paying you as well as making sure that you are paying your own bills if you can. Ideally, you would have your normal monthly bills, like your telephone rent electric insurance all get auto drafted from your bank account. Just make sure you have enough funds in there to cover these items. That way, you're not in the business of writing checks all day long, however, This could also be outsourced to a bookkeeper if you like. If you have any W two employees as part of your company, then you will need to figure out how they will get paid and how payroll will be administered. I recommend using a payroll service company or having an accounting firm handle it for you . This is something that you do not want to do yourself. I have another lesson in this course that discusses this aspect more fully so a bookkeeper can handle your day to day stuff and make sure things get properly recorded. But you may need to utilize the services of an accountant if you need more complex expertise, for example, and bringing in like if you wanted to bring in partners, for example, or borrowing money, adding new product lines or whether it makes sense to hire new employees offering a retirement plan for employees, etcetera. Things of that nature. You can hire one on a freelance basis, or it could even be the same person that does your tax. Now when it comes to tax time. If you are a sole proprietor and you feel that your information is accurate, then you may be able to do it yourself by using like turbo tax. However, if you have partners involved or have a corporation set up, then you will want to utilize the services of an accountant to help you file your taxes on time and in an accurate manner. All the information that is prepared by your bookkeeper can then be passed on to your tax person. For them to prepare appropriate tax return that is due to the ire S in a timely manner with the cloud based solutions like QuickBooks online or wave accounting. You can even set up your tax person as a user on the account they convened your financial activity for accuracy from their location. Now, eventually, there could come a point in your business where you want to hire a bookkeeper or in accounting professionals in house, as opposed to outsourcing. That will also depend on your specific situation as a general rule of thumb. If you have less than 20 employees and less than about a 1,000,000 revenues, you could probably get by with outsourcing this task. Once you reach that higher level than it may make sense for you to hire your own staff for those functions. Check with your accountant or your tax person when you think you may be nearing that point for further guidance. And that will conclude the lesson on the accounting, bookkeeping and tax services that you may need for your company and we will continue on in the next lesson. Thank you. 17. Payroll Service Company - Is it Proper for Your Business?: Okay, welcome back. And this lesson, we will go over utilizing the services of a payroll company payroll service company. If you have any number of employees for your business, you will soon realize that there are a lot of taxes that you need to worry about. You need to make sure everything is fall properly and on time. Here is a chart that goes over all the various payroll taxes. As you can see, this is very burdensome and can potentially be a huge time suck for you that will take your focus away from dealing with your customers and on revenue producing activities. Thus, the biggest no brainer that you can do for your business is to outsource this function and hire a payroll service company. They have their systems automated, where they will file all the payroll taxes for you accurately and on time. The amount of money that you can save by doing it yourself is not worth it. The amount of places where you can get tripped up is many if you don't do it properly. There are a few services that I have used over the years, and they are a DP paychecks QuickBooks payroll service by into it and on pay. I've really gotten toe like the software by On pay is more of a do it yourself payroll situation, but can work out nicely. If you are just starting out, I'll attach links in the resource Is section your accountant or C P. A firm will probably offer a payroll service as well. All you have to do is tell them who to pay and how much, and they will take care of the tax filings toe all the government agencies. They have the systems in place to do it all and do it timely inaccurately. And at the end of every quarter and at the end of the year, they will father tax returns that you need to do, and they will send your employees at W. Two or a 10 99 which they will need to fill out their tax returns. They will pay your employees and pull the funds from your bank account. You just need to make sure that the funds are available in the account. If you don't have funds available, they will lock you from processing future payroll. They will also handle the new hire reporting requirements that were put in place during the Clinton administration to try and track down child support evaders. Every time you hire and fire employees, your state agency wants to know about it. One note about hiring employees. Make sure you have all of them fill out an I nine form, which for advice, somebody, someone's identity and make sure they are legally allowed toe work in this country. Also have them fill out a W four form. This will tell you exactly how much you need to withhold from them. For I arrest tax purposes. I will link to these forms. In the resource is section that will wrap up this discussion on utilizing a payroll service company. We will continue onward to the next lesson. Thank you. 18. Hiring Tax Professionals: Okay, welcome back. So in this lesson, we will look at using a tax professional for your business. So at the end of the day, once all of your transactions are recorded by your accounting system, whether that's QuickBooks or some other software, your tax preparer will take that information and use it as a basis for preparing your business tax return. He may also need other information, for example, like a mileage log to complete out the business. Right tax return as well. If you are a so proprietor with a simple business, you may be able to get away with using TurboTax. They even have other software that can do it. For other business entities, like corporation. However, the benefits of using a qualified person to prepare your taxes is that they can number one save your money. They confined deductions and reduce your taxes and ways you may not have even imagined number two. They can assist you. If you were ever audited by the I. R. S number three. They can help you with tax planning throughout the year if your situation changes So you are not hit with ah, big tax bill. And even worse perhaps penalties if you find that you have underpaid throughout the year and finally they can properly handle the accounting for start up costs in your first year of operation. Those are handled differently than your normal business expenses in that they are normally spread out over a period of time, normally five years. There are some peculiarities with regards to start up costs, so at least for the first year that you are operating, you should get a tax preparer to help you with your taxes. In later years, you might be able to do it yourself, just copy from the year before if you're so proprietor. But for other scenarios that definitely pays to hire someone for this task. And when you are looking for an accountant for your taxes, make sure they are a C P A. That specializes in taxes. Not all CPS handle tax returns. Some of them specialize in audits, and some specialize in business consulting along with other areas of practice. Or you can hire someone that is an enrolled agent. They are people that have passed rigorous testing requirements required by the I R s and are able to prepare taxes and represent individuals during an IRS audit to find someone that can help you with your taxes. Ask your family and friends and business associates for any recommendations. You can also do a Google search and make sure they have positive reviews by looking at their social profiles. Angie's list is another place where you can find reviews on various local businesses that will wrap up this lesson on hiring a tax professional for your business. We'll continue on word in the next lesson. Thank you.