You started a business, you worked like crazy, and now it’s finally time to pay yourself for all the hard work. That’s awesome, but where do you find these payments on your financial statements?
The treatment of owner’s pay is determined by the structure of the business.
Single-member LLC (sole proprietor) or a partnership:
Payments to the owner(s) do not show up on the profit and loss statement, but instead are recorded in the equity section of the balance sheet. When you take money out of your business to pay yourself, it is not considered an expense. Likewise, it is also not considered income when you put money into the business for capital.
S Corporation (and LLCs that elect this tax treatment):
Payments to the owner(s) in and S Corp are often treated in a few different ways. In a corporation, you must pay yourselves a “reasonable wage,” which means that part of your pay will be your wage (subject to tax withholding), and part of your pay will be a distribution (not subject to withholding). Wages will be recorded on the income statement as an expense, while distributions will be recorded in the equity section of the balance sheet.
Payments to the owner(s) are considered wages and will be recorded in the expense section of the income statement.
If you want an accurate picture of how well the business is doing after your owner’s pay is included, I would suggest you use the cash flow statement along with the profit and loss statement. The cash flow statement includes the information on the profit and loss statement plus any balance sheet transactions (such as payments on loans and owner’s pay). This statement will give you the best answer about how your business is doing!
What is Cost of Goods Sold?
Cost of Goods Sold (COGS) is the total of all costs for products that have been sold. This includes any costs that are directly related to producing your goods or services. It does not include indirect expenses, such as marketing or office expenses.
Standard costs that go into COGS:
- Cost of materials
- Cost of containers
- Cost of labels
- Cost of labor directly related to making the product
- Shipping costs
- Cost of storing inventory
How to Calculate COGS
To calculate your Cost of Goods Sold, you will need the following information:
- Beginning Inventory – This should be the cost of all your inventory at the beginning of the period. It should be the same as your ending inventory for the previous period.
- Inventory Purchased – This is the total cost of all inventory purchased during the period.
- Ending Inventory – This is the total cost of all products remaining in your inventory at the end of the period. It is always a good idea to do periodic physical inventory counts throughout the year, and certainly on the last day of the year.
COGS = (Beginning Inventory + Inventory Purchased) – Ending Inventory
Why is the Cost of Goods calculation so important?
Understanding Your Profits
Businesses need to know how profitable their product sales are. This ensures that the profit margin they are making is enough for their business to continue operating, and for it to grow effectively.
By understanding your Cost of Goods Sold, you will be able to see how profitable each product is. With this information, you will be able to see if you have “super-star” products (those that cost little to make, but sell for a high margin), as well as those that might not be performing at that level. By knowing your COGS and your profit margin, deciding what products and services to sell becomes much easier.
It is very important to know your COGS for tax purposes. Reporting accurate cost numbers will ensure your tax returns are accurate. Overpaying or underpaying your tax liability happens frequently for those that don’t properly record their costs.
What should you take away from all this?
COGS is extremely important for you to fully understand your small business. For reasons from product selection to taxes, knowing Cost of Goods Sold is critical.
Credit for Other State Taxes
Last week, we had a client call to ask if it is normal to owe several thousand dollars on their tax return in both Kansas and Missouri. The answer? No, it is not normal. There are some situations where this happens, however, if you are only a W-2 employee, you shouldn’t owe a lot of tax in both states. We see this situation a lot when we have individuals who work in one state and live in another. Most of the time, in these cases, there is an error on the input of the tax return. In do-it-yourself software like Turbo Tax, the credit for other state taxes is often left off. If you don’t know where to find it, you will miss it.
Most states give you credits for taxes you paid on income in both states. This avoids you getting taxed twice on the same income. To claim this credit, you will need to fill out the Credit for Other State Taxes worksheet within your resident state return. On this form, they will ask for the income that was taxed in both states, as well as the tax you paid associated with those wages. When this form is filled out correctly, the tax in your resident state should be reduced by the credit you can claim. This will directly reduce the amount of tax you owe.
If you think that you are paying too much in both states, give us a call at 913.748.4880. We will look and see if you can amend your return!
Why should I reconcile my bank every month?
We are frequently asked, “Is it really necessary for me to reconcile my bank? It downloads into QuickBooks Online and I record everything there.” The answer is, YES! It is incredibly important that you are reconciling your bank and credit card accounts every month.
There are three main reasons you should do this:
Find Duplicate Transactions
Duplicate transactions happen all the time in QuickBooks Online. The feeds between QuickBooks and the bank often have little hiccups, if not breaking all together. When this happens, transactions often get brought into the banking screen more than once, creating duplicate transactions. If you don’t reconcile your bank, you could be reporting too much income, or too many expenses. Just last week, we had a client’s feed between Bank of America and QuickBooks Online not connect for a couple days. When it finally did connect, it brought in two weeks’ worth of transactions that had already been recorded. Had we not been reconciling the bank, we may have never found them.
Find Missing Transactions
While duplicate transactions may happen, the opposite can be true as well. Potentially, when there is a glitch in the feed between QuickBooks Online and the bank, whole days of transactions will not come through. If this happens, you may not be reporting enough expenses, or income. We find this is frequently the case with QuickBooks, and unless there is a transaction you are specifically looking to remember, you likely won’t even notice the day was skipped!
Find Outstanding Checks
If you mailed a check to your vendor 60 days ago, you would expect that they have already taken the check to the bank and the check has cleared your bank account. How many of us are guilty of forgetting the checks we send? I am for sure! 😊 When I reconcile my bank, I always look for checks that still haven’t been cashed and were sent out 30 days or more prior to reconciliation. If I find any of these, I call my vendor immediately to make sure they received the check. I do not want to pay late fees or have a vendor angry at me for not paying while the check possibly got lost in the mail. If you reconcile every month, you will find these checks and be able to keep your vendors happy.
Reconciling all your bank and credit card accounts often seems like a tedious task, but it makes sure your financial information is correct. You can’t run or grow your business on inaccurate information!