What Should You Track in Your Books?
Jun 13, 2024Shannon starts by reminiscing about her childhood love for organizing school supplies—a delightful memory that segues beautifully into how we should approach our bookkeeping. Just as we used to categorize our notebooks and folders for different subjects, we can similarly organize our books in QuickBooks.
In QuickBooks, there’s a fantastic feature called the “chart of accounts.” Think of it as your blank bookshelf, where every binder and folder has its designated spot. When setting up your accounts, these are essentially the categories where your transactions will live. According to Shannon, this attention to detail allows for better organization and ultimately more useful financial insights.
One primary takeaway from Shannon’s discussion is the level of customization available in QuickBooks. Many users stick to the default accounts that QuickBooks provides, but Shannon emphasizes that with the help of a skilled bookkeeper, you can customize your accounts to fit your specific business needs.
The concept of "income centers" is another gem Shannon introduces. By breaking down your revenue into various sub-accounts, you gain more insight into the different streams of income your business generates. For example, if you run a coaching business, separate your income into one-on-one coaching, group sessions, and course sales. This granular separation helps in understanding which segments of your business are performing well and which need improvement.
Examples of Income Centers:
- **Coaching Business**: One-on-one coaching, group sessions, course sales.
- **Law Firm**: Estate planning, contracts, business law.
- **Hair Salon**: Haircuts, color treatments, nail services.
Shannon also highlights the benefit of categorizing income by the type, such as recurring versus non-recurring revenue. This separation provides clearer insights into your business’s financial health and helps set informed goals.
On the flip side, we have cost centers, which are categories for your expenses. Here, customization is equally crucial. You can create granular categories such as Facebook ads, TikTok ads, and photography expenses, but Shannon advises balance. Over-categorization can make bookkeeping cumbersome, while under-categorization can obscure valuable insights.
- **Advertising and Marketing**: Facebook ads, TikTok ads, agency fees.
- **Operational Costs**: Utilities, rent, office supplies.
- **Travel Expenses**: Travel meals, lodging, airline tickets.
Shannon points out the importance of aligning your expense tracking with what’s genuinely useful for your business analysis.
Shannon provides some specific tips to help make tax season smoother, both for you and your CPA:
1. **Separate Business Meals**: Categorize meals during travel differently from regular business meals as they are 100% deductible, unlike regular business meals that are only 50% deductible.
2. **Officer Compensation**: For S corporations, track officer compensation separately from other salaries and wages. This distinction simplifies tax filing and ensures accuracy.
3. **Charitable Contributions**: Place charitable contributions under "other income and expenses." This placement helps isolate them from your operating income, as they are not deductible in the traditional sense but flow through your K-1 to your personal tax returns.
Lastly, Shannon emphasizes the power of the net operating income (NOI) line in QuickBooks. This specific calculation helps you understand your business's true profitability before considering expenses like owner’s compensation and charitable donations. By organizing your accounts so that these types of expenses fall under "other income and expenses," you get a clearer picture of how well your business is doing operationally.
What you'll hear in this episode:
05:10 Hair salon can offer various services, increase revenue.
07:20 Simplify content tracking for better bookkeeping.
11:22 Understand the significance of net operating income.
If you like this episode, check out:
Why Should You Separate Your Business Money from Personal Finances?
What a Balance Sheet Actually Tells You
Want to learn more so you can earn more?
Get $50 off your HR audit with People Principles by using code SHANNON50 here.
Visit keepwhatyouearn.com to dive deeper on our episodes
Visit keepwhatyouearncfo.com to work with Shannon and her team
Watch this episode and more here: https://www.youtube.com/channel/UCMlIuZsrllp1Uc_MlhriLvQ
Connect with Shannon on IG: https://www.instagram.com/shannonkweinstein/
The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
