Depreciation

That’s it for this week folks, boy it is really a tough job picking just 10 favorites every week. What were some of your favorite articles/blog posts? Care to share any of them with us?

QuickBooks Tips – Year End Tasks for Filing Taxes

Published January 4, 2011 | By Nancy Smyth

The end of the year always adds even more tasks to your already busy schedule, and sometimes it is simply overwhelming and I’ve often been asked – “What do I need to do?”

Intuit has built a very good “QuickBooks Year-End Guide/Checklist” and it’s included right in your QuickBooks program by going to the Help Menu and choosing Year-End Guide. Over the next few days, we’ll cover each topic listed in the Year-End Guide, and offer some additional tips on each of the three sections: Tasks to prepare for filing taxes, Tasks to do if you use subcontractors, Tasks to do if you have employees and some Tips for the upcoming year.

Tasks to prepare for filing taxes:

Reconcile all bank and credit card accounts – now really you should have been doing this every month…but if for some reason it’s been several months since these accounts were reconciled here’s a quick way to reconcile multiple months all at once – accurately.

Determine which month was the last month that was reconciled.
Gather all of your bank or credit card statements and put them in order; oldest on top and most recent on the bottom. If you don’t have all the statements, please don’t be tempted to just “skip” that month, contact the bank and ask for a copy, or if you have on-line banking capabilities get a copy off the internet.
In QuickBooks go to the Banking Menu and choose Reconcile.
In the Begin Reconciliation window
- Choose the Account you wish to reconcile (you can choose either your bank account or your credit card account) from the drop down Account List.
- The Statement Date should be the ending date of your most recent statement.
- The Beginning Balance should be the same as the Beginning Balance of your oldest statement. If for some reason the amounts are not the same, click the link that says “What if my beginning balance doesn’t match my statement?” and follow the instructions in the QuickBooks Help file to determine what is wrong and how to correct the problem.
- The Ending Balance should be the amount shown as the ending balance on your most recent bank statement.
- Enter any Service Charge for the most current statement only – (we’ll put the rest in manually), please don’t be tempted to “add them all up” and put that amount here.
- Enter any Interest Earned for the most current statement only – (we’ll put the rest in manually), please don’t be tempted to “add them all up” and put that amount here.
- Click the Continue button which will bring you to the Reconciliation window.
- To enter Service Charges and/or Interest Earned for additional months, leaving the reconciliation window open, from the Banking Menu – choose Use Register and enter the transactions individually using the closing date of the statement as the date of the entry. Additionally you might want to create “Other Names” called Bank Service Charge and Interest to use in the Payee Field when recording these transactions, just to make reconciling easier.
Working from the statements, oldest one first, just go through and check off each deposit and check until you are finished.
If you find checks or deposits on the statements that are not in your QuickBooks file, go to the Banking Menu and choose Use Register, record the transaction with its original date, assigning the amount to either Ucategorized Income or Uncategorized Expenses – so that later you can run a Year to Date Profit and Loss Report, zoom in on those accounts and find the hard copy of the original transaction and correct the entry or entries.

Verify petty cash entries for the tax year – again, this is something that you should be doing every month, but if you have several months that you need to reconcile, it can be accomplished following the instructions above.

Make year-end accrual adjustments and corrections – I usually suggest that you work with your accountant on these matters.

Close your books – I usually suggest that you close your books for the fiscal year with a password – only the QuickBooks Administrator can do this, but it does prevent accidental changes to already reconciled transactions by others. Of course, the QuickBooks Administrator can make changes to transactions as required and a closing date exception report can be generated by going to the Reports Menu, choosing Accountant & Taxes, and then selecting the Closing Date Exception Report. With QuickBooks 2011 you don’t need to worry about this effecting Non-Posting transactions such as Estimates & Purchase Orders.

Adjust Retained Earning – QuickBooks does this automatically, so there should be no need for you to have to do this manually.

Review details of all new equipment purchased during the year – if you are using QuickBooks Premier (including Premier Contractor, Manufacturing, etc.) you should and can enter details about your fixed asset purchases by going to the Lists Menu and choosing Fixed Asset Item List – otherwise you will have to track these items on an Excel Worksheet, a Word Document, or in QuickBooks itself by adding Sub-Accounts to your main Fixed Asset account for each piece of Equipment that was purchased and adding as much detail as possible in the Name, Description, and Notes boxes.

Make all asset depreciation entries and adjustments – I usually suggest that you work with your accountant on these matters.

Review fringe benefits that need to be reported on Form W-2 – Fringe benefits can include Health and Life insurance, public transportation subsidies, moving expense reimbursements, employer provided vehicles, educational reimbursements plans, group-term life insurance, employee loans that are forgiven, and Union Fringe Benefits. If you aren’t sure if any of the benefits that you offer your employees should be included on their W-2’s consult your accountant.

Take a physical inventory and reconcile with book inventory – it is important that you take a year end physical inventory; I usually suggest that you include a copy of that physical inventory sheet for your accountant and let them give you the appropriate adjusting entries to record in QuickBooks.

Print financial reports – from the QuickBooks Year-End Guide/Checklist click on this topic for reports to print. Keep in mind that these reports will not have adjusting entries from your accountant and that amounts will change. I would recommend that when you create the suggested reports that you modify them and add a report subtitle called “Prior to Adjusting Entries”. After you have entered the adjusting entries from your accountant, rerun these same reports adding a new subtitle called “After Adjusting Entries”.

Print income tax reports to verify tax tracking – from the QuickBooks Year-End Guide/Checklist click on this topic for an explanation of what is involved for this action item. You should ask your accountant for help in setting up the correct tax tracking for each item on your Chart of Accounts.

Import your tax-related data to Turbo Tax or ProSeries – from the QuickBooks Year-End Guide/Checklist click on this topic for an explanation. If you do not prepare your own tax returns you can definitely skip this section.

Print and mail forms W-2, W-3, 1099, 940, 941, and 1096 – remember you no longer need to buy pre-printed W-2 and W-3 forms as QuickBooks will print these forms on plain paper; you will still need to purchase preprinted 1099 and 1096 forms.

Archive and back up your data – backing up your data is something that you should be doing on a very regular basis as part of a disaster recovery plan in the event of computer virus, computer failure, etc.

Archiving your data is something that you should do if your file is large – contains more than 3 years of data – although some businesses will have extremely large files after only 2 years. Creating a new company file each year is not necessary and not recommended for contractors; you probably have jobs that span over the course of 2 calendar years or more and you will want access to complete details relating to those jobs for job costing reports. There are, however, times when creating a new file is appropriate, such as you have several years of data with early years containing lots of data entry errors, or your data file has become damaged and cannot be repaired.

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Starting a New QuickBooks File? Benefits of the EasyStep Interview

Published December 1, 2010 | By Nancy Smyth

When you use the EasyStep Interview to create a new QuickBooks company file, you will be asked questions about the type of business you own as it walks you through the process of setting up your business in QuickBooks. Your answers will be used to help you get started quickly , by setting up the appropriate accounts and lists. It will take you about 30 minutes to go through the EasyStep Interview.

Creating a new company file in QuickBooks is easy and you can access the new file wizard in many ways.

From the File menu, choose New Company
If you have been working in a sample company file, click the Start your new company file now button on the upper right corner of the Home page.
From the No Company Open window (when you first start QuickBooks), click the Create a New Company button

Any of these actions will launch the EasyStep Interview, which will walk you through the creation of you new company data file by asking you a series of questions about the type of business you own. It uses your answers to get you started quickly, by setting up the appropriate accounts and lists.

The following is a list of the accounts that QuickBooks creates automatically, if you selected the Construction General Contractor business type in the EasyStep Interview and indicated that your company is an S-Corporation.

Accounts Receivable – Created during the EasyStep Interview, or the first time you create an invoice.
Inventory Asset – When the first inventory item is created in a company data file, QuickBooks creates the Inventory Asset account.
Construction in Progress – Automatically creates this Other Current Asset account when you select the Construction General Contractor business type in Step 2 of the EasyStep Interview. While the account is automatically created, QuickBooks does not have a built-in or automatic method of tracking Construction in Progress.
Retainage Receivable – This account is created when you select the Construction General Contractor business type in Step 2 of the EasyStep Interview. While the account is automatically created, QuickBooks does not have a built-in or automatic method of tracking Retainage Receivable.
Undeposited Funds – An Other Current Asset account used to you record a payment from an invoice or a sales receipt. QuickBooks uses this account to hold money you’ve collected until you deposit it in a bank account.
Accumulated Depreciation – A Fixed Asset account used to hold depreciation information that relates to furniture, fixtures, and equipment that your company owns.
Furniture and Equipment – A Fixed Asset used to hold information about the furniture, fixtures and equipment your company owns.
Accounts Payable – Used to hold information about how much money you owe your vendors and subcontractors.
*Payroll Liabilities – QuickBooks adds this account to the chart of accounts automatically when you turn on the payroll feature in a company file. QuickBooks initially maps all payroll items that create liabilities to this account.
Sales Tax Payable – Tracks sales tax that you have charge to your customers and owe to the government; it’s created when you turn on the sales tax feature or you indicate that you charge sales tax in Step 10 of the EasyStep Interview.
Capital Stock – This Equity account is automatically created based on the options you selected in the Step 3 of EasyStep Interview.
Opening Bal Equity – This account is created the first time you enter the opening balance for a balance sheet account. Every time you add a new account with an opening balance, QuickBooks records the second half of the entry in the Opening Bal Equity account. This means that total equity is the net balance of the assets minus the liabilities entered into QuickBooks. Once you’ve entered all of the accounts and balances, you may use a journal entry to allocate Opening Balance Equity to the proper equity accounts. Consult your accountant for help with this.
Retained Earnings – This account is unique because there is no register associated with it. Each time you run a balance sheet, you assign the date of the report. QuickBooks then calculates the net income from all transactions from the earliest date in the company file to the end of the fiscal year prior to the current year. QuickBooks displays the results as retained earnings. Because of this feature, you don’t need to make the traditional closing entries at the end of the year.
Shareholder Distributions – This Equity account is automatically created based on the options you selected in the Step 3 of the EasyStep Interview.
Uncategorized Income – This account is used the first time you enter an opening balance for a customer directly into the customer record.
**Cost of Goods Sold (COGS) – When the inventory feature is turned on and the first inventory item is created in a company file, the Cost of Good Sold (COGS) account is created. When you choose the Construction General Contractor business type in Step 2 of the EasyStep Interview, several individual Cost of Goods Sold accounts are created – Blueprints and Reproduction, Bond Expense, Construction Materials Costs, Equipment Rental for Jobs, Other Construction Costs, Subcontractors Expense, Tools and Small Equipment, and Worker’s Compensation Insurance.
Expenses – When you choose the Construction General Contractor business type in Step 2 of the EasyStep Interview, several expense accounts are automatically created that might be useful in your business – Auto and Truck Expenses, Bank Service Charges, Business Licenses and Permits, Depreciation Expense, Insurance Expense, Interest Expense, Meals and Entertainment, Office Supplies, Professional Fees, Rent Expense, Repairs and Maintenance, Telephone Expense, and Utilities.
*Payroll Expenses – This account is created when you turn on payroll in a company data file. All payroll expense items are initially mapped to this account.
Uncategorized Expenses – Created the first time you enter an opening balance for a vendor from within the actual Vendor record.
Reconciliation Discrepancies – An expense account used when you enter an adjustment to reconcile small accounting discrepancies, it is used to track all reconciliation differences.
Ask My Accountant – QuickBooks automatically creates this Other Expense account, which is used to hold transactions that you aren’t quite sure how to classify. When you use this account, make sure that you use the memo field of the transaction to hold details that will help your accountant correctly classify the transaction – don’t rely on your memory.
Estimates – creates this account for you to hold information about estimates or bids that you’ve created for various customers. This is a non-posting account that does not affect your balance sheet or income statement.
Purchase Orders – created the first time you issue a purchase order to a vendor/subcontractor. This is a non-posting account that does not affect your balance sheet or income statement.

* A single Payroll Liabilities and Payroll Expenses account can be very limiting; subaccounts should be created for each type of payroll liability and expense.

** Rather than several individual Cost of Goods Sold Accounts; create a “Parent” account and make the individual accounts “subaccounts”.

Other Chart of Account blog articles:

QuickBooks Job Costing – Determining Equipment Costs per Hour

Published July 14, 2010 | By Nancy Smyth

Determining the cost-per-hour for each piece of equipment or machinery that your company owns and uses on a job site is a great tool for understanding, and even eventually, recouping the actual cost of the machine itself. Once you have this information, you can improve the accuracy of your bidding, book equipment and machinery costs in your accounting software, and even identify ways in which you can maximize expenditures throughout the year.

Equipment and machinery cost-per-hour rates are calculated by adding together three distinct pieces of information:

What it costs to own or lease (acquisition cost-per-hour)
What it costs to maintain (maintenance cost-per-hour)
What it costs to run operate it (running time fuel consumption cost-per-hour)

1. Calculating Acquisition cost-per-hour (ACPH)

Formula: Divide the total price paid (including interest paid) by the projected number of lifetime hours.

Example:

21” rotary mower purchase price:	$1,100.00
Interest	none
Lifetime hours:	750 hours (2.5 hours/day, 5 days week/30 weeks/year for 2 years)
Salvage value:	none

Acquisition cost-per hour: $1,100.00 divided by 750 hours = $1.47 per hour

2. Calculating Maintenance cost-per-hour (MCPH)

Formula: Divide the estimated lifetime maintenance cost (repairs, parts, labor, blades, spark plugs, oil changes, filters, etc.) by the number of lifetime hours.

Example:

Lifetime maintenance cost: $600.00

Maintenance cost per hour: $600.00 divided by 750 hours = $0.80 per hour

3. Calculating Running-time Fuel Consumption cost-per-hour (RT/FC CPH)

Formula: Determine how long one gallon of fuel lasts for the piece of machinery. Divide the price per gallon of the fuel by the hours used each day.

Example:

Cost per gallon of fuel: $2.50

Running-time fuel consumption cost-per-hour: $2.50 divided by 2.5 hours = $1.00 per hour

Total Cost-Per-Hour:$1.47 Acquisition cost-per-hour (ACPH)$0.80 Maintenance cost-per-hour (MCPH)

$1.00 Running-time Fuel consumption cost-per-hour (RT/FC CPH)

$3.27

Let’s look at another example, this time determining the cost-per hour for a compact tractor.

Purchase Price:	$23,000.00
Interest:	$ 5,520.00
Salvage Value:	$ 8,000.00
Life Expectancy:	3,000 hours (300 hours per year for 10 years)
Lifetime Maintenance Cost:	$18,000.00
Fuel Price:	$2.50 per gallon
Fuel Used per hour:	1.5 gallons

Acquisition cost-per-hour (ACPH): ($23,000.00 + $5,520.00 – $8,000.00 = $20,520.00)

$20,520.00 divided by 3,000 hours = $6.84

Maintenance cost-per-hour (MCPH): $18,000.00 divided by 3,000 hours = $6.00

Running-time fuel cost-per-hour (RT/FC CPH): $2.50 divided by 1.5 hours = $1.67

Total Cost-Per-Hour: $6.84 + $6.00 + $1.67 = $14.51

Notes: Your dealer should have data regarding estimated lifetime maintenance cost and fuel consumption. If you buy used equipment, cost it out using the “new” purchase price. The total cost-per-hour is usually the same for new and used equipment, and useful life, repair and maintenance costs, are easier to determine for new equipment. Using the new purchase price also automatically adjusts your rates for inflation and price increases.You can cost out leased machines using the same formulas and adjusting the life expectancy, lifetime maintenance and fuel price, to account for the shorter term.

To determine fuel cost, you can also fill up the tank and divide the fill-up price by the total running hours.

Even if you prefer to base your estimates on a per-labor-hour rate, the Cost-Per-Hour method prevents you from understating or overstating the actual equipment cost for the job being bid.

You can verify your Cost-Per-Hour figures in several ways:

Compare your hourly rates to those of your local equipment rental company. Reduce their rental rates by 40-50% to remove their markups. Your rates should be reasonably close to theirs.
Contact your local dealer to verify maintenance costs, production rates, fuel consumption, lifetime hours, etc.
Contact your local Department of Transportation (DOT) office, they have manuals containing CPH data for maintenance, and will often share these figures with you for comparison purposes.

Ways in which you can reduce your Cost-Per-Hour figures:

Take advantage of multi-unit discounts offered by some manufacturers.
Check with your local dealer about new engine technologies.
Use the CPH calculations to develop a better understanding of which piece(s) of equipment will lower your field operation costs over time.

You can also use the Equipment Cost-Per-Hour (ECPH) to develop a better understanding of which pieces of equipment, or brand, could actually lower your field operation costs over time. By matching up the purchase price of several different pieces of machinery against long-term variables, such as annual maintenance cost and serviceability, production rates, fuel costs, etc., the ECPH will help you to confirm the truth of you get what you pay for.

Armed with the knowledge of equipment cost-per-hour, bring this into your accounting program and job costing. This will help you to take the “guess-work” out of future bidding and increase your company’s bottom line.

_________________________________________________________________________

Realizing that these formulas are complex and time-consuming to perform; and the fact that given the current state of the economy, that it is extremely critical to be able to quickly and accurately, update these prices at a moment’s notice – we’ve developed an Excel spreadsheet that will allow you to quickly and easily update these figures.

Download our Equipment Cost Calculator at http://www.sunburstsoftwaresolutions.com/view-document-details/equipment-costs-calculator.htm.

QuickBooks equipment job costing instruction

Once you know your Equipment Costs per hour, use QuickBooks to track these costs for job costing purposes by downloading our FREE 17-page eBook “Advanced Job Costing – Getting Equipment Costs into Job Costing” by clicking here.

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QuickBooks Tip 10 Plus Methods of Accounting for Construction Contracts

Published June 1, 2010 | By Nancy Smyth

Every contractor, regardless of their business structure (sole proprietor, partnership, corporation) has to choose an overall method of accounting; before the first federal tax return is filed. Accounting methods include:

the cash method
the accrual method
the accrual method which excludes retentions, and (possibly)
a hybrid method(s)

Depending on the type, size, and length of the construction contract, there are various methods of accounting for long-term construction projects that are allowed – each method has its own advantages and disadvantages.

A contractor will need to select a specific long-term contract accounting methods – possibly with different methods for it’s exempt and non-exempt contracts – and also selects sub-treatments for the classification of contracts and the allocation of indirect costs.

In a nutshell, accounting for long-term contracts relates to the treatment method that is chosen; or that is required by the rules and regulations of the tax code, in order to account for income and cost recognition for long-term contracts.

10+ Methods of Accounting for Construction Contracts

Method	Revenue Recognition	Cost Recognition
Cash	As payment is received	As expenses are paid, except for depreciation and capitalization rules.
Hybrid – (Part Cash/Part Accrual	Cash or accrual – depending upon the method selected	Could be cash or accrual. For example, the contractor could use the cash method for receipts and disbursements AND accrual for inventory and payables related to inventory.
Accrual	As billing invoices are issued	Based on economic performance regulations of §461(h)
Accrual Excluding Retention	Based on when billing invoices are issued OR billings minus retainage deferred under the contract. Recognition of retainages, once entitled to receive	Based on economic performance regulations of §461(h)
Completed-Contract (CCM)	Billings or total contract price once contract is finished and accepted. See 1.460-4(d) for revenue recognition for disputed contracts	Costs are deferred as incurred. Specific costs are outlined in 1.460-5(d). Once completed, costs are closed out to expense.SG&A costs are expensed as incurred. See 1.460-4(d) for expense recognition for disputed contracts.
Exempt Percentage-of-Completion (EPCM)	Contract price (including change orders) multiplied by percent complete.Percent complete determined by various alternative methods, such as: Cost-to-cost Labor hours to total labor hours Various other permitted input and/or output measurements	Based on economic performance regulations of §461(h).Costs determined by 1.460-5(d). All costs are expensed as incurred.
IRC §460(b)Percentage-of-Completion Method (PCM)	Revenues determined by only the cost-to-cost formula	Based on economic performance regulations of §461(h).Costs determined by 1.460-5(b). All costs are expensed as incurred.
IRC §460(b)(3) Simplified Cost-to-Cost Method	Same formula as §460(b), except costs determined as outlined by §460(b)(4) or 1.460-5(c)	Based on economic performance regulations of §461(h).Job costs are direct material, direct labor and depreciation, amortization, and cost recovery on equipment directly used. All costs are expensed as incurred.
Reg. 1.460-4(e), §460(a) Percentage-of-Completion/Capitalized-Cost Method (PCCM)	Use PCM formula as §460(b) with same type of costs for 70%, and use exempt contract method for the remaining 30%.	For 70%, same as the §460 PCM method, the balance of the contract is accounted for by the exempt-contract method.
IRC §460 10% Deferral Method	Same as §460(b) above, except that revenues and billings on all contracts with less than 10% complete, determined by the cost-to-cost formula, are deferred until greater than 10% complete.	Based on economic performance regulations of §461(h).All costs are expensed as incurred. All costs on contracts less the 10% complete are not expensed as incurred, but rather are deferred in an account similar to an inventory account