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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 - 

 

Account

Debit

Credit

Prepaid Insurance

$600

 

Cash

 

$600

Totals

$600    

$600

 

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.   

Account

Debit

Credit

Insurance Expense

$100

 

Prepaid Insurance

 

$100

Totals

$100    

$100

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

 

 

Summary

 

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

 

If Debits = Credits, you are in balance!

Smile Face.jpg 

 

Gambling Winnings and Taxes

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Thumbnail image for Deck of Cards.jpg

 

 

 

 

 

 

 

 

 

 

 

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.   
 

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
Santa 

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. 

 

 


 

 

 

 

 

Math, Music and Horses

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What in the world do math, music and horses have in common? A few words that come to mind are rhythm, footfalls, drill teams, dressage, number of strides, timing, counting...

I get goose bumps watching dressage riders and their steeds dancing to music. It flows, they are one. Each step matches each beat of music.

A musician feels so much emotion when everything comes together. Someone once told me that professional musicians are out of tune all the time. I thought really? The difference between professionals and dabblers is that pros know how to adjust quickly prior to being noticed.

Accountants and mathematicians feel great when everything balances or when they have figured out an equation that took a lot of practice.

Feeling beats, being in perfect balance with your horse and counting seem to be much different than managing your cash flow. However, I would argue they are different forms of the same breed. Every great businessperson, accountant, symphony conductor, horse trainer and dressage rider each want the same things. That is balance and synchronization. Does one person do this alone? Absolutely not! Does any racehorse win by themselves? No, they have a team of trainers, riders, owners, jockeys and even accountants making sure everything comes together.

Imagine you are in a tie for Grand Champion and the judge asks you to show him in two minutes why you are the grand champion. They give you very little time to think about it. You go out there and your horse just carries you. All you do is think what you want and he knows what to do. He even gives a bow at the end just because. The announcer says you won. It is the most empowering moment of your life.

Recognize your strengths and weaknesses. Seek people and horses who complement you. "May all your endeavors-relationship, business and equine-related-be Grand Champion rides!"

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BECKY SMITH

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 Saratoga.com. 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.