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ACCOUNTING BEGINS WITH A, D, C (Account, Debits and Credits)

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My Dad was a chemistry teacher and part of his teaching method included applying other areas of study to chemistry.   He would explain that chemistry was not a subject unto itself.   It also includes writing and solving math problems.  He required his students to write scientific papers and also solve math problems as they related to chemistry.  Most of the exams he gave were problem-solving, not guessing the answers to a series of multiple choice questions.   My Dad applied these concepts to all aspects of his life. Working in the garden with him I learned much more than gardening.  Some of the many topics we talked about included insects, soils, fertilizer formulae and the names of weeds.  I am very thankful for my Dad and proud to be his little girl. 


Many people have asked me over the years how I went from a degree in music to accounting.  In addition to my Dad's genetics, I have come to learn that math and music are actually processed and understood from the same part of the brain:  Music is math, but it uses different symbols.


One of the first songs I learned to play on the piano was "Do, Re, Mi."  These symbols represent the first 3 notes of a musical scale.  Scales are the foundation of music.  Without a solid foundation, further study can be very difficult to master.   Once the basics are learned the rest is simply variations of the same theme. 


When we add and subtract we begin with 1, 2, 3. 


When we ride horses we begin with W, T, C.  (Walk, Trot, Canter).


Accounting begins with A, D, C (Account, Debits and Credits). 


The combinations of A, D, C--much like Do, Re, Mi--are infinite.    Not all note combinations are appropriate or sound good, however.  The same is true of accounting.  Accounts, Debits and Credits need to be recorded properly for everything to come together in perfect harmony. 


An Account is the place where financial activity is summarized for various categories of records (e.g.   horse purchases, lesson income, hay, grain).   Accounts are an organized way of recording the ins and outs of your money.  When you buy a horse you receive a receipt for the purchase.  The amount you paid is recorded in an account called an asset.  An asset is one of five major categories used in accounting.  The other four are liabilities, equity, revenue and expense (More details on these in another blog).


An asset is something you own that is used in the operating or investing activities of your business.  Assets are the "goodies" of your business that hold their value over an extended period of time.  Physical, tangible types of assets include horses, barns, tractors and trailers. 

Debits and credits

Debits and credits are a fancy way of describing additions and subtractions of the activity in accounts.  A debit can be an addition or subtraction depending on what type of transaction you are recording.  The same is true of a credit.  The following example illustrates how to record the purchase of a horse, an asset.   

Each account has a debit side and a credit side.  Debits must equal credits in any transaction that is recorded.  Additions to an asset are debits and subtractions from an asset are credits.  In my example, the horse was paid for with cash, another asset.  The balance in my horse (asset) account increases (debit) and cash decreases (credit).                                        




Asset: Horses






Totals (Debits = Credits)




Description: Purchase of TB Barney's Pride


If we look at each account separately the activity would look like this:


Beginning Balance                                                        $ 2,500.00

Purchase of Barney (Subtraction = Credit)                     $(1,000.00)

Ending Cash Balance                                                     $1,500.00       


Beginning Balance                                                         $20,000.00

Addition of Barney (Debit)                                             1,000.00

Ending Horses Balance                                                  $21,000.00


In my opinion, accounting is much more than numbers.  Its applications are numerous.  Any time a financial exchange occurs the basic concepts of accounting are being used.   My plan is to continue to discuss accounting basics and gradually increase the difficulty of the examples.  My goal is to help you learn the basics of accounts and how debits and credits affect the different types of accounts.  As I write about these concepts I will apply them to the horse industry. 

You do not become a grand champion rider overnight.  It takes years of practice.  The same is true of other disciplines such as math, music and science.  Each starts with basic concepts which are taught in a series of exercises of gradually increasing difficulty.  With some patience, discipline and practice life gives us infinite possibilities.






How to record prepaid expenses

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Expenses that are purchased and paid for in advance are classified as prepaid expenses.   For example, a horse stable may purchase fire insurance to protect the business from unforeseen occurrences.   The following will show how to account for a fire insurance payment as a prepaid expense.


Your fire insurance bill is due on May 15 for insurance coverage from May 15 to Nov 15, a future coverage period.   Payments made for future periods are considered paid in advance or prepaid.  This prepaid expense is an asset of your business until the time lapses.   As time lapses, this asset becomes an expense.


On May 15 you send in a $600 payment to your fire insurance company. 


When recording any type of transaction, balance is the key.  What is recorded in one account must equal what is recorded in another account.  To which accountants refer to as debits must equal credits (more detail about debits and credits in future blogs).


To record your $600 fire insurance payment you will need to record $600 in 2 accounts.


1)      Prepaid Expense - Add (Debit) $600 to the balance in this account. 

2)      Cash - Subtract (Credit) $600 from the balance in this account. 



Quiz time! 

Q - Do debits equal credits?

A - Yes!  If debits + credits = 0, then we are in balance.  Another way to tell is if your accountant smiles!


Visually, this transaction looks like this - 





Prepaid Insurance










On June 15, 1 month (1/6 of 6 month coverage) of coverage has lapsed.   This is the part where you would start changing your asset (prepaid expense) into an expense.   Doing this moves the lapsed amount from one account to another, a reclassification. 


Since only 1 month of coverage has lapsed, we only record $100 which is 1/6 of $600.


1)      Insurance Expense - Add (Debit) $100 to the balance in this account. 

2)      Prepaid Insurance - Subtract (Credit) $100 from the balance in this account.   




Insurance Expense



Prepaid Insurance






 As part of recording monthly transactions, you would repeat this step every month for the remainder of the coverage period.   





A prepaid expense is an asset which changes to an expense as the coverage period lapses. 


If Debits = Credits, you are in balance!

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Gambling Winnings and Taxes

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A former co-worker of mine has a son who was asked to tell his teacher what the four seasons are. 

He said, "Summer, Fall, Winter and Tax Season!"  When you are an accountant who prepares tax returns, this is so true.  

Many people do not realize all of the sources of income that are fully taxable.  This can be quite the shock when it comes time to file their tax returns.   Gambling winnings is a source of income that must be reported on your tax return.   Any money you win from lotteries, raffles, horse races, or casinos is taxable.  I can hear some of you saying "But can't we claim our losses?"   While this is true, it is only true for those who itemize deductions.  If you have no idea what "itemize" means, chances are good that you will not be able to claim your losses.  Even if you itemize, you cannot deduct more losses than the winnings that you report on your tax return. 

Some gambling winnings are subject to Federal income tax withholding.  Each facility (casino, racetrack) handles how they pay out these winnings differently.  Also, this generally does not include state income taxes.  So, you will need to plan for this.  If your winnings are subject to Federal income tax withholding, a payer (such as a casino or racetrack) is required to issue you an IRS Form W-2G.  This piece of paper is similar to a W-2 only it reports your winnings not your salary.  

Other gambling type income that you may not have considered is the fair market value of prizes such as cars and trips.  My motto, as harsh as it may sound, is: "If you can't afford to pay the taxes on the value of the prize, you shouldn't enter the contest."  


As a reminder, if you haven't already filed your tax returns, there are only 9 days left to tax season.   Due date is April 15, 2010.


Good luck!  I wish nothing but refunds for all of you!

K.I.S.S. - Keep it Simple, Sweetie.

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Recently, I worked on a software customization project in preparation for implementing new software.  I realized rather quickly that the input methods that were being used were a bit confusing.  The data entry process had too many paths.  People who enter the data can become frustrated if they have too many decisions to make.   

I have learned that work flow set up can be as much an art as it is a science.   Programming computer software is very scientific.   Art comes into play when you try to make a complicated piece of software simple to use for all users.  As Mairzy Doats' writer, Marion Altieri, often says, "run fast, turn left..." 

I want to do the best-possible job of advising you, my readers, about the tools and methods that will help grow your equine business--so I've been scouting around to find great computer programs that will make your office time less and your barn time, more.  I think I'm on to something, which I'll tell you about as soon as I have all the information in front of me. 

Keeping accounting records should not be a chore.  Leave your pitchfork at the barn.  You need something that is easy to use and keeps you in the race.   

Springtime Memories

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Spring and horses.jpgI love springime, don't you?  I have more energy, the snow goes away, and I can ride in an outdoor arena again.  

I have been working on some great blogs and promise to publish them soon.  In the meantime, please tell me your favorite horse related springtime memory.    

Looking forward to reading your stories.  May you and your horse enjoy this wonderful time of year.


Photo credit - (via google image search)


Dear Santa, I Want a Pony for Christmas

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Santa Claus.jpgDear Santa,
I Want a Pony for Christmas.

Thank you,
Bonnie from Greenwood


Dear Bonnie,

Taking care of a pony is something very special, but it is a big job.   You were very good this year and you deserve a pony!  You will know which pony is for you when you meet him or her. To help you get started, I am giving you these tickets for riding lessons at a riding stable, a great place where you will learn how to ride and take care of a pony. After awhile you will know if owning a pony is right for you.  Your parents can help you find that very special pony who will be your Best Friend Forever.   I must warn you however, caring for a pony takes commitment and money. You and your family will need to make a plan for how you are going to care for your new friend. 

Prior to owning a reindeer team, I owned a beautiful pony named Flash. It took awhile to find him--and convincing Mrs. Claus that it was a good idea!  But when I did find him, and talked Mrs. Claus into it, I knew in my heart we were meant to be together.  Once you are ready and know that you can provide the necessary care that a pony needs, it will be the most precious gift of all.  

Love from

Care, Custody and Control: the Three Cs of Sales Tax

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tax pic.jpgMany New York State commercial horse boarding facility owners do not know that the majority of their boarding services are taxable. 

This means that facility owners must charge and collect sales tax from their boarding customers.  Penalties, interest and in some cases criminal charges for not reporting and remitting sales tax can be quite severe. 

Taxable boarding services fall under what New York State calls Care, Custody and Control:  I call this the Three Cs of Sales Tax  

So what's Taxable in New York State under The Triple C Rule? 

Taxable services include, but are not limited to (In alphabetical order, not in order of importance): 

• Administration of  Shots
• Blanketing
• Burial of dead animals
• Buying and Administration of  special feeds or supplements
• Calling the Farrier or Vet
• De-Worming
• Exercising
• Feeding
• Grooming
• Holding for Farrier or Vet
• Maintenance of tack
• Mucking Stalls
• Resale of tack
• Spraying for Flies
• Watering

These taxable items should be addressed in your boarding contract that has been signed by each of your boarding customers.  If you charge an all-inclusive monthly fee for boarding which includes these services you need to make sure that this is addressed in the boarding contract.   Sometimes these items are a separate charge and should be addressed separately.  For example, you charge $10 for every de-worming.  This fee is taxable and is not included in the basic monthly boarding fee.  Whatever arrangement you have with your boarding customers make it clear, in writing what is included and what isn't included in your monthly boarding fee.

In addition, your boarding customers need to know that you will be charging sales tax for the boarding services as set forth in the boarding contract.  New York State has a 4% sales tax rate and each county within New York State has a sales tax rate.  Add these two rates together and this is the rate you charge your customers. 

For example, if a facility's full board rate is $500 per month and the facility is in Schenectady County, the rate is 8% (4% state plus 4% county).  The sales tax amount that is charged is $40 per month (.08 X $500). 

The sales tax amount would be written in the boarding contract and can be shown as a separate line item, such as,

Tax every month of 8% ($40 in addition to $500 boarding fee per month).

For a complete listing of sales tax rates by county in New York State you may refer to New York State Department of Taxation and Finance Publication 718,  "New York State Sales and Use Tax Rates by Jurisdiction."
Now for some good news!  Some horse boarding related services are not taxable to your customers. 

Non-Taxable in New York State:  What I call the ITS

I - Instruction
T - Training
S - Showing

Some items Included under the ITS rule:
teaching and/or training/retraining of horses; 
teaching group or individual lessons; 
use of indoor arena by non-boarders;
trailering to shows;
use of tack and
animal prep for show.

Now for some bad news. 

Once you have collected sales tax from your boarding customers, you must pass this money on to New York State.  You are not allowed to keep this money.  Contrary to popular belief, sales tax money that you collect is not yours!  How do you go about submitting sales tax?  The simplest way is by going to and filing online.  Does this require that you keep track of your sales?  Absolutely.  (We'll leave this topic for another day.)

New to the horse boarding business?  Contact your state's department of taxation and finance, get registered and pay your taxes. 

For those of you who have been in business for a number of years and have not been paying sales tax and should be,  there is the Voluntary Disclosure and Compliance Program
Per New York State's taxation and finance website -

Voluntary Disclosure and Compliance Program:

"Under the Tax Department's new Voluntary Disclosure and Compliance program, eligible taxpayers who owe back taxes can avoid monetary penalties and possible criminal charges by:
• telling the Department what taxes they owe;
• paying those taxes; and
• entering an agreement to pay all future taxes.

It's easy to apply. Just follow the prompts, answer a few questions, and submit your application electronically. Once we receive your application, we'll review it and contact you."

While this may not seem like a plan of action you want to take, it certainly beats the alternative of having the Tax department find out from a competitor or a disgruntled boarding customer.  Anyone can go to the New York State website and report someone for not reporting and/or paying sales tax. 

If you operate a commercial horse boarding facility within New York State, you must charge your boarding customers the applicable sales tax rate for the county in which you operate.  Otherwise, when the New York State Department of Taxation and Finance comes to your house or boarding stable they will not be very lenient with penalties and interest.  This can add up to a significant amount of money especially if you have been operating your horse boarding facility for several years.  

Triple C rule - If it is a service that is considered care, custody and control it is taxable and your boarding customers pay you sales tax, which you then remit to New York State.

Its rule - Instruction, training and showing is not taxable and you do not have to collect sales tax. 

Horses know when we are stressed.  Be proactive, follow these simple rules to keep the burden of tax auditors off your withers.  Your horses will appreciate it.


Disclaimer - most states have similar requirements and programs.  For questions regarding sales tax laws in your state, you should contact your state's taxation and finance department.  




Rein In Cash Reconciliations

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Accounting paperwork.jpgFriends of mine owned a business and they kept their financial records on QuickBooks.  Every month when they received their bank statement, they opened up QuickBooks on their computer and reconciled their cash transactions with their bank statement.  Because they recorded their information on a regular basis, the bank reconciliation took no time at all.  Once in awhile I would be at their business when the bank statement arrived and they were actually happy about receiving their bank statement.   This type of reaction is not what I am used to, so I was quite proud of them.  

I believe that people do not like to reconcile their cash because it is too easy to procrastinate recording daily cash transactions.  When the bank statement arrives, their records are scattered around their office.   Sound familiar?  It does to me:  I procrastinate  about washing the dishes.  I would rather clean stalls all day than wash dishes.  If I wash them every day and don't let them pile up, then it isn't so bad.  Once they start to pile up, I turn off the light and walk out of the room. 

Are you like my friends, someone who keeps up with the daily maintenance of recording cash transactions--or do you procrastinate and throw your bank statement in a corner when it arrives? 

Before I give you my thoughts and tips on bank reconciliations, I want to know what your questions are and why you reconcile or don't reconcile your cash. 

Help me help you rein in the mystery of cash reconciliations.   Please email your thoughts on cash--or on procrastination in general business matters--at the address to the right. 





Say "Whoa!" to Fraud!

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Black iron triangle.jpgChuck Wagon Cook.jpgHave you ever watched a Western movie and noticed the cooks?  Ok, I have to admit I found the horses a lot more interesting.  However, the cooks had the power of the triangle.  They would ring the wrought iron triangle and the hungry cowboys came riding in because they knew the chow was ready.  I am not entirely sure why a triangle was used to alert people that food was ready to eat but it does have a loud sound that can be heard from long distances.      

Triangles can also help illustrate a story, and explain a business theory.  One particular triangle to which accountants refer is the fraud triangle.  The story illustrated by this particular triangle is something that all business people should read.  It tells the story of Need, Rationalization, and Opportunity. 

Let's discuss this concept with a hypothetical story: 

Tommy worked for ABC Riding Stable, but was struggling to make ends meet.  He was getting calls from creditors demanding payment.  He needed more money than he was making.  (Note: This leg of the fraud triangle is also referred to as motive, pressure or incentive).  Tommy felt the best way for him to get the creditors off his back was to "borrow" money from his boss.  (Note:  Tommy did not approach his boss to ASK to borrow the money-it's theft).  His rationalization for this was that he would only need to take money once and would pay it back before anyone noticed. 

Tommy had incentive, and he knew that he would give back the money.  The only piece left was to figure out the how part of his plan.  In order for this to work, the right opportunity needed to be in place so he could take care of the creditors and give back the money.  A vehicle for carrying  out his rationalized plan had to be implemented. 

One weekend Tommy was collecting money from riding clinic participants.  His boss asked him to take the money to the bank on Monday.  This was the opportunity Tommy needed to steal--"borrow" the money.  He collected all the money but recorded only a partial list of participants.  The money that was deposited matched what he collected from the recorded participants.  By omitting the registrations of others, he could slide the money into his pocket--it didn't even seem to be wrong. 

A week or so after the clinic, Tommy's boss, Henry, was talking with one of the participants.  He remembered seeing her at the clinic but not her name on the registration list.  Henry decided to investigate the matter.  The names of at least two people on the registration list, whom Henry knew had attended, were missing. 

Henry called the police and Tommy was arrested for theft.

In order for fraud to occur there has to be opportunity to commit fraud.  The triangle is not complete without all three sides.  Tommy's ability to commit this fraud would have been broken if a few things had been modified by Henry. 

Some examples of ways to modify this situation, which would have helped to deter Tommy's fraud:

• Prepare a list of all pre-registered participants and have them initial or sign by their name. 
• Money received via pre-registration could be sent to a lock-box at the bank where it would safely be deposited into your account.
• Consider accepting credit card payments.
• Require the money collected at the event be dropped into a locked safe that the collector did not know the combination. 
• Whenever possible separate cash related duties such as having one person collect the money and another person deposit the money.

These examples are just a few of the many ways to break the opportunity leg of the fraud triangle.  My hope is that you will rein in the basic concept of the fraud triangle so you can understand; access your individual performances; modify your methods and bring fraud down to a smooth, easy halt. 

Disclaimer -  No one committed a crime, the story of Tommy is fictional and is meant to illustrate a business theory. 








Cash is King

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Horse Chess-Nut 1.jpgThe expression, "Cash is King,"  has been around a long time, and for good reason:  Cash is the first asset listed on a balance sheet (see definition below).  Hence it is the leader (King) of all other accounts.   In chess, the King is the highest-ranking game piece.  All other pieces protect the King.  If the other pieces are knocked out, the King will fall and the kingdom is lost.   

Another analogy:  just as the King is the highest-ranking face card in a deck of playing cards, Cash is the leader of the accounting pack.   

Whichever analogy you use,  a leader needs a team and vice versa.  Cash can make or break a company.  Without cash, bills cannot be paid, and employees will not be paid and you may incur more debt. 

Can we live without credit in today's economy?  Doubtful.  However, we can be smarter about how we manage that balance between cash and credit.  Credit can be good, but if you don't have the cash to pay off the debt you can get into a less-than-desirable situation very quickly.

It is vital that we practice doing things within our means, especially in a weakened economy.  It is difficult and won't happen overnight, but it can be done.  It starts by paying attention to the ins and outs of your cash.  If you have debt are you able to make your monthly payments and still pay all of your monthly operational expenses (e.g.,  hay, grain, training, electricity, employees). 

Some ways of protecting your Kingdom that you may want to consider:

*    Create a plan. 
*    Map out your income and expenses each month. 
*    Seek out a method for a cash plan or budget that works for you. Is the amount of cash that goes out each month higher than the cash coming in?  I do not recommend incurring more debt.  Put off some projects and cut your expenses in order to increase the amount of cash in while not increasing the amount of cash going out.
*    Do not take on more than you can manage. 
*    Have patience. 
*    Build your client base.   Once you have a solid base, grow your business in small increments. 
*    Keep your emotions away from your financial decisions.  If you are too emotionally attached to your business you may want to pass the financial decision making to someone else.  Channel the emotional side towards other areas of your business, such as customer service or running of specific programs.


Cash is the King in your deck of business playing cards, that which is to be protected at all costs in your business chess game.  The rewards will be worth it. 



Glossary of Terms

Balance Sheet - Financial summary of assets, liabilities (debt) and net worth of a business, organization or person at a given date.   

Liabilities + net worth = the sum of all assets.




"Horse Chess-Nut" by Artist Sandy Gianniny (via google images search)




























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Becky Smith has a rich background in music, business, accounting and equestrian studies—just some of the experiences and interests that she brings to the table in her role as blogger here on Her passionate love for all equines has drawn her close to the species, in an intuitive way that helps her truly understand the horses she encounters in her various volunteer and professional efforts. Her passion started at a young age when she relished jumping vegetable crates with her stick horse on the front lawn of her family’s farm. It wasn't long before she graduated to riding a real, live horse named Candy Lane. From there she moved up to showing her pony, Flash and horse, Karib. Becky is fascinated with all aspects of the horse world. She has experience with western, English, jumping, dressage, Centered Riding and gymkhana—and every day discovers new disciplines and breeds, adding to her storehouse of knowledge and enthusiasm.

Becky has worked in accounting for over 10 years, and envisions growing her business, Equiccount, to serve and advise those who, like herself, love horses—but who may not have her business acumen. Her connection to the horse and understanding of horse people sets Equiccount and Becky apart from other business advisors who may not get the spirit of equine business with as much depth. Many accountants love accounting. All horse people love horses. Becky feels passionately about both, and so brings fresh insight to the intersection where the two worlds meet. Her blog will help readers grow their own equine businesses, while gaining knowledge of basic business and accounting principles as taught from a compassionate standpoint. In other words, she gets it that readers may be bored to tears by the nuts and bolts of accounting and business. And that's OK, too: as long as she gets it, advisees can hand the reins to her and know that they'll get a smooth ride, and clear every obstacle on the course.