QuickBooks 2011 offers a new advanced Balance Sheet by Class Report that differs from other QuickBooks reports because it gives users the option of selecting “Classes” (fund, location, profit center, or other category) as their column grouping. This will enable QuickBooks users to perform divisional accounting with QuickBooks, which was previously impossible or required significant duplication of effort.
While this report has been one that has been requested by many QuickBooks users and the accounting professionals who support them, it is not without limitations and drawbacks, making this a report that will be able to be used by some companies and in some instances but not all.
In our previous article, QuickBooks 2011 – New Balance Sheet by Class Report – Part 1, we touched briefly on the fact that transactions will have to be entered in a very specific manner and there are many data entry transactions that are not supported by the Balance Sheet by Class Report.
The first limitation that we will discuss is Journal entries with “unbalanced” classes. This limitation will affect CPA’s and other accounting professionals; and will require that they change the manner in which they create journal entries in client files – if they or their client chooses to use the Balance Sheet by Class Report.
An “unbalanced” journal entry occurs when you as the CPA or other accounting professional creates a journal entry that changes ONLY one side of the balance sheet for a specific class. This creates an “unbalanced” balance sheet for the class.
For example, your company purchased some computers, and you want to create a journal entry moving $500.00 worth of the computers from Class 2 to Class 1. You would normally create a journal entry as follows:
| Account | Debit | Credit | Class |
| Computer & Office Equipment | 500.00 | Class 1 | |
| Computer & Office Equipment | 500.00 | Class 2 |
Right click on the image to enlarge it.
While the overall entry balances – meaning debits equals credits – from the “class” perspective the entry is NOT in balance because it increases assets in Class 1 while decreasing assets in Class 2. When using classes in Journal entries Debits MUST equal credits for EACH class.
Procedure to “balance” the journal entry
You will need to make a journal entry where debits equal credits for each class. This procedure will require accountants to perform additional data entry and change their journal entry procedures.
To do this, in your chart of accounts create an Other Expense type account called Other Expenses Clearing Account. Once you have created the account you will then use it to balance the classes in the journal entry, like this:
| Account | Debit | Credit | Class |
| Computer & Office Equipment | 500.00 | Class 1 | |
| Other Expenses Clearing Account | 500.00 | Class 1 | |
| Computer & Office Equipment | 500.00 | Class 2 | |
| Other Expenses Clearing Account | 500.00 | Class 2 |
Right click on the image to enlarge it.
Just remember, that the balance in the Other Expenses Clearing Account should ALWAYS be zero – debits and credits (or money in & money out amounts) are equal.
View this video by Intuit demonstrating the Balance Sheet by Class Report in action.
Our next article will discuss how to handle paychecks that are allocated to multiple classes.
NOTE: Most of the information contained in this article has been based on information found in the QuickBooks In-program help. Intuit has done a very good job documenting the required procedures to successfully implement the Balance Sheet by Class Report.
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QuickBooks provides you with a powerful, and time saving tool within your items list, which is often under utilized and often misunderstood — the QuickBooks Group Item.
5 Reasons To Use QuickBooks Group Items:
- Creating and using Group Items is useful for quickly entering a group of individual items that you have already set up as single items in your Item List.
- Group Items are versatile – you can choose to print – or – not to print the items within the group, meaning you can track more detail than your customer needs to see.
- Group Items ensure that you don’t “leave something out” – which means lost dollars on your part.
- Group Items speed up the creation of Estimates and Invoices – imagine being able to pull in 19 items with a single click of a mouse.
- Group Items allow you to bridge the difference in units of measure used to buy and sell products or materials.
“Back in the day”, as my son-in-law would say, before QuickBooks had a Unit of Measure option – I think it was introduced with QuickBooks 2007 – we had to rely on QuickBooks group items to perform Unit of Measure calculations.
Using Group Items to bridge differences in units of measure used to buy and sell materials.
Suppose you are an Electrician and buy wire in spools of 1,000 feet, but when you invoice your customers you do so by the foot. By using group items we could effectively bridge this difference by following the steps below.
1. Verify that Inventory & Purchase Orders are active, by choosing Edit, Preferences, Purchases & Vendors, Company Preferences
2. Add a Sub-Account to your main Inventory Asset Account on your Chart of Accounts called Wire
3. Create an Inventory Part item for a foot of wire, called “Feet of Wire” and assign it to the “Wire” Account from your Chart of Accounts
4. Create a Group Item called “Spool of Wire”
5. Add the “Feet of Wire” Inventory Item with quantity of 1000
How we used these items once they were created:
When you buy the wire, use the “Spool of Wire” Group Item on your Purchase Orders, your checks, or bills and QuickBooks will add 1000 feet of wire to Inventory.
When you sell the wire, use the “Feet of Wire” Inventory Part Item on your Estimates, Sales Orders, or Invoices and QuickBooks will remove those amounts of wire from Inventory.
Would you believe that even though QuickBooks now comes with a Unit of Measure ability, there are still some people that prefer this method?
How many of you remember this method of creating a Unit of Measure using Group Items?
Payroll is an essential part of your business – not just a weekly, bi-weekly, or monthly annoyance. Payroll is the primary way that employees are rewarded for good job performance and retained. If you are issuing late or incorrect paychecks it can lead to dissatisfied, unmotivated workers – or worse. It’s hard to keep good employees when a company gets payroll wrong.
The relationship between employees and employers is highly regulated by the government and many of these regulations involve payroll. There are literally hundreds of things that you have to know, as well as hundreds of mistakes that you can make. As a result, the payroll process is much more complicated than anyone who has never done it can possibly know.
The consequences of some mistakes can be more serious than just your paychecks simply being incorrect. Many mistakes result in getting a very hard time from people you don’t know (and certainly don’t want to know) – the federal and state enforcement types.
Below are 7 of the most common payroll mistakes which occur during payroll processing.
1. Poor Data Gathering
Payroll errors – overpayments, underpayments, misclassification, and job costing errors all start with the information that is contained on employee timesheets that is in turn given to the person responsible for inputting that information into QuickBooks, who then creates the final employee paycheck.
2. Improper Overtime Payments
Everyone knows hourly employees get time-and-a-half after 40 hours of work a week. Right? Not always!
Employees must be paid according to all the mandates of the Labor Department and the states. Are you calculating the overtime rate properly?
- A very common small business practice is granting compensatory overtime or “comp time” (time off) instead of paying overtime as legally required. This is illegal in most situations. Under the FLSA for example, only state or government agencies may legally offer comp time and, even then, it is subject to a long list of exclusions. Some states do allow it, but it’s certainly tricky!
Overtime is not always 1.5 times the employee’s hourly rate!
- You may have to add in other payments, such as production bonuses, shift differentials, prevailing wage fringe benefits in order to determine the overtime rate.
You must follow any state Wage and Hour regulations if they are more generous than the federal rules.
3. Ignoring Other Taxable Items
There will be times when you need to withhold taxes from more than just the employee’s normal wages.
All gifts, prizes, bonuses, and awards that employees receive are taxable, including the use of a company car.
Some Union Fringes are taxable, such as a Vacation or Health & Welfare fringe. These items should be included in the employee’s normal paycheck and set up as a taxable company contribution item type.
4. Mishandling Garnishments, Levies, or Child Support Payments
Part of your company’s payroll activities may include having to withhold and pay money your employees owe to a third party.
The government decided, long ago, that the best way to collect certain court-ordered or court determined debts was to go directly to the person’s source of income – you, the employer – and collect the money directly from the employee’s wages.
This can be a quagmire for employers of every size. There are rules for withholding, for how much an employee must be allowed to retain, and for which one of multiple claims are paid first. Naturally, the states do get involved, usually requiring that child support be paid first. But, if a federal tax levy arrives at your office first, it is paid first.
5. Mixing Reimbursed Employee Expenses with Normal Payroll
Many times I’ve seen employees bring in receipts or expense reports and the payroll clerk has added those reimbursements into the normal employee paycheck.
Don’t let yourself get caught in this situation – as you could have some “tall explaining” to do later and in some states there is a fine attached for just this sort of situation. An employee’s paycheck is just that – his compensation for the hours that he worked for you on a weekly basis and that is what should be reflected on his weekly paycheck.
If an employee submits receipts or an expense report, cut a separate check just for that and keep that money out of payroll!
6. Miscalculating State Unemployment Tax
State Unemployment Tax is an employer-paid but state-run program and each state has their own set of rules.
One common mistake that I’ve seen employers make when there is a delay in Intuit receiving the necessary information from the tax agency is that employers feel that they need to do a manual adjustment to increase the liability. This is totally unnecessary as the payroll module will automatically catch up, without any additional help from you.
7. Missing Tax Deposits and Filing Deadlines
There are substantial penalties for missing deadlines, for depositing your payroll taxes and filing the required reports.
Nearly every payroll clerk in a large company has a calendar with all the deadlines for federal, state, county and municipal tax deposits and tax filing deadlines for the entire year. You must also report the earnings and withholdings of each employee, payment to contract workers, total withholding amounts and other information. If you don’t have such a calendar, you can set up “Reminders” in QuickBooks; but you will have to look at them. On a normal day-to-day basis you naturally have other things to worry about, but if you aren’t conscious of these deadlines, you’ll miss one of them sooner or later and be faced with a hefty penalty for late payment or reporting….plus interest.
You may also be required to use EFTPS (Electronic Federal Tax Payment System) for your payments.
Part 3 of Payroll Mistakes will cover common errors at year end.
Sam Subcontractor already uses QuickBooks, he has more complex job costing needs due to certified payroll reporting requirements, payments of prevailing wage fringe benefits and AIA billing. High overhead costs, specialized equipment, materials, labor charges are other things that must be taken into consideration.
QuickBooks Estimating, Job Costing, and payroll needs will vary depending on the type of contractor you will be dealing with, so if anyone dares to suggest that one “Chart of Accounts or bookkeeping method” will work for all contractors – well you just shouldn’t listen to them, and here’s why:
Meet Sam Subcontractor:
I have worked for a lot of “Sam’s” they are great people too. They usually have the same basic philosophy as Harry the Handyman; however, because they have employees and bigger “operations” they realize that they need to consider more things when they go out to bid on a job; but they do not always realize all of what they need to take into consideration.
Sam has overhead costs, employees, specialized equipment, company vehicles, materials, and more that he needs to take into consideration when estimating. He works on private and prevailing wage jobs. When he works on prevailing wage jobs he has to pay his employees a much higher rate of pay plus prevailing wage fringe benefits and submit weekly certified payroll reports. Billing requirements for his jobs include Time & Materials and Percentage of Completion, where he needs to submit AIA billing forms and track retainage.
Sam tells you that he was just awarded a contract on an ARRA funded construction, the job will last about 18 months and he has to pay prevailing wages to his employees, submit certified payroll reports, monthly ARRA reports, and AIA format billings and will need to hire 5 additional employees. He is nervous – his workers comp and general liability insurance premiums are killing him; he knows that part of his high overhead is due to the fact that he is paying the prevailing wage fringe benefit it cash to his employees.
Sam has QuickBooks Pro 2008 and he has used it to run payroll for his employees. He has been using Excel to do his bidding, billing, certified payroll reports, and his job costing. He knows that he has to make sure that he is bidding high enough to make a profit and stay in business; yet not so high that he is no longer competitive.
Let’s look at some of Sam’s costs that you as his bookkeeper, ProAdvisor, CPA should help him identify for estimating and job costing purposes.
- Overhead – rent, phone, electric, trash service, etc.
- Liability Insurance
- Worker’s Compensation Insurance
- Wages (private & prevailing wage jobs)
- Employee Benefits – health insurance (?)
- Tool Purchases
- Materials
- Prevailing Wage Fringe Benefit Costs
- Insurance for vehicles and equipment
- Registration for vehicles and possibly some equipment
- Repairs to vehicles and equipment
- General Maintenance for vehicles and equipment
- Gasoline and/or Diesel fuel to run vehicles and equipment
- Vehicle & Equipment costs on his jobs
As a bookkeeper, ProAdvisor, or CPA with a client like Sam, you are going to have to spend some extra time helping Sam set up his books.
You will find that Sam is going to be more than willing to make changes – but that he is NO bookkeeper! He also knows that he needs to make things easier because he is spending too much time in the office doing paperwork – when he needs to be on the jobsite.
One of your biggest challenges with Sam will be communication – he is going to talk construction and you are going to be talking accounting…..learn his language and help him learn yours.
A basic plan of action for Sam would be to:
- Move his Excel based tasks into QuickBooks
- Turn his Estimating Cost Code list into a QuickBooks Item List
- Teach him to use the QuickBooks Estimate function to do his bidding
- Teach him how to use QuickBooks for Job Costing
- To automate his Time & Materials Billing
- To run Estimate vs Actual Reports so he can tell how much money he’s making & if he is bidding accurately
- Teach him how to job cost his payroll by using Weekly Timesheets
- Teach him to use Purchase Orders to track material purchases
- Implement Workers Comp and General Liability tracking
- Implement Vehicle and Equipment Costing procedures
- Implement a Retainage Tracking system
- Research ways in which to lower General Liability and Worker’s Compensation costs
- Implement QuickBooks integrated applications to deal with AIA Billing, Certified Payroll, and the ARRA Reporting
Sam will feel very overwhelmed and out of his element, he will probably want to hire you for on-going review of his QuickBooks file, just to make sure that he is doing things right – he may even want to hire you to come in on a weekly basis to help him out.
TIP: Paying prevailing wage fringes in cash will increase Sam’s General Liability and Worker’s Compensation costs, especially if they are based on gross payroll instead of gross sales.
Request our free eBook on 4 Ways Contractors Pay Prevailing Wage Fringe Benefits.
The word “contractor” is a vague and widely misused term which cover everyone from the local handyman who makes repairs/improvements on your house to the contractor who is building or repairing a bridge on your local highway.
Who are contractors?
Understanding the different types of contractors and the roles that they play in the construction industry will enable you to realize just how different their QuickBooks accounting and compliance needs will be. “Contractors” are “construction-related” businesses including:
- Your “local handyman” – who is a jack of all trades and does a little of everything. He will work on various “jobs” for private homeowners and usually bills on a Time & Materials or Cost Plus basis.
- General/Prime Contractors – A general contractor will take full responsibility for the completion of the project, often times subcontracting out a substantial part of the work, while maintaining overall control through Project Managers and on-site supervision.
- Construction Managers – Generally, a construction manager does not perform actual construction work on a project; rather they act as an agent for the project owner. A construction manager may be hired in lieu of or in addition to a general contractor. As an agent, the construction manager coordinates the actual construction project, but has no contractual relationship with the subcontractors.
- Commercial Contractors - Commercial contractors specialize in commercial construction projects which may require the submission of AIA Billing invoices in order to be paid and include the construction of a single building or any number of buildings including:
- Retail Projects – shopping centers, restaurants, grocery stores
- Rental Facilities - office buildings, industrial parks, apartments
- Business Locations - company headquarters, manufacturing plants, insurance companies
- Municipal Buildings - city halls, prisons, schools, hospitals
- Special Projects - amusement parks, race tracks, coliseums, churches
- Residential Contractors (Custom Home Builders, Remodelers, Property Rehabilitation) – A residential contractor specialized in the construction of single family homes, duplexes, etc., usually buildings for resale to one or more individual homeowners.
- Commercial Project Owners - The owner of a construction project may be an individual, corporation, partnership, or government body who evaluates whether a project is feasible and will provide the future benefits desired. The owner will then hire an architect or engineer to design the plans and specifications of the project. Normally, the owner will obtain necessary financing for the project for both the construction period and permanent financing upon completion, if applicable.
- Residential Construction Developer (Spec Home Builders, Land & Lot Developers) - A residential construction developer is usually the owner of the residential development as well as the builder. The developer usually acquires the land, obtains approval, secures construction financing, and begins construction of the residential development in stages or phases of construction. The initial phase is sold, and the construction process begins on the next phase. This process requires that the builder allocate a per-unit cost to each unit sold.
- Subcontractors - Subcontractors include specialists, such as plumbers, electricians, framers, concrete workers, etc. They are distinguished from the general contractor by a limited scope of work, which usually involves a specialized skill, knowledge, or ability. Subcontractors enter into construction contracts with general contractors, and they may provide the raw materials used in their specialty area. The general contractor, not the project owner will pay the subcontractors. Materials which are purchased by the subcontractor are usually delivered directly to the job site. A subcontractors’ work may be completed in stages, or it may be continuous.
- Highway Contractors - Highway and street contractors require specialized equipment and techniques. The equipment that they own may include bulldozers, graders, dump trucks, and rollers. Highway construction projects can include city streets, highways, country roads, highway bridges, and tunnels and will require the submission of certified payroll reports.
- Heavy Construction Contractors - Heavy construction contractors require large and complex mechanized equipment, such as cranes, bulldozers, pile drivers, dredges, and pipe-laying machines. Some examples of construction projects in this category include dams, large bridges, refineries, petrochemical plants, nuclear and fossil fuel power plants, pipelines, and offshore platforms; many of which require the submission of certified payroll reports.
- Architect/Engineers - An architect or engineer designs the plans to be used by the construction contractors, these plans provide the necessary details (dimensions, materials to be used, location of fixtures, etc.) to the contractors. When the project is started, the architect/engineer may monitor the contractor’s progress and often approves progress payments (using AIA Format) to the contractors.
- Material Suppliers – Material suppliers provide the raw materials used in the construction project. Material supplies are purchased by the subcontractors and installed by them in accordance with their contract. General Contractors often write joint checks to subcontractors and material suppliers to ensure that all parties have been properly paid.
- Construction Lenders - The construction lender provides the necessary funds to pay contractors on a progress basis. As construction work progresses, the construction lender will advance funds based on the work performed or based on a payment schedule – usually in the form of AIA billing.
- Surety Companies – Sureties are usually insurance companies who provide bonding to contractors; bonds provide a form of insurance to the owner. Performance bonds protect the owner if the contractor fails to complete the construction work.
Knowing the differences between the type contractor your QuickBooks client or potential client is – will help you to design an effective accounting system for his business.
