LedgerBench

Operating expenses are incurred by businesses to keep the business going, includes staff wages, supplies not include manufacturing cost. Operating expenses does not include manufacturing cost or cost of goods sold (direct labor, material, manufacturing overhead) or capital expenditures (building or machinery) 

What is included in Operating expenses?

Following are included in operating expenses:

Insurance

Rent

Research

Utilities

License     fees

Accounting     fees

Office     supplies

Attorney     fees

Vehicle     expenses

Travel     expenses

Payroll     for staff excluding labor for manufacturing 

Marketing     including social media channels such as Facebook

Building     maintenance and repairs

Property     taxes on real estate

Operating expenses are reflected in the company's income statement.

What does an increase in operating expense mean?

An increase in operating expense would mean less profit for a business. Often operating expenses receive more scrutiny from a company, as these types of costs may be less fixed, and their non operating expenses, capital expenditure and manufacturing costs. 

A company’s area manager would try to reduce operating expenses by outsourcing a few areas of business or allowing some employees to work from home. This cuts down actual physical space used by the staff. Management may also try to implement money saving techniques such as automating parts of the business or reducing salaries for the new hire. 

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What is a non-operating expense?

A non-operating expense are the expenses that are not related to the company's day to day business operations or manufacturing. These include costs for:

Depreciation

Amortization

Bank     fees including interest charges

Restructuring     costs

Obsolete     inventory including products that cannot be sold

Lawsuit     payments and associated fees

Currency     exchange fees

Are operating expenses included in COGS?

No, operating expenses and cost of goods sold (COGS) are shown separately on a company’s income statement. This is because COGS are directly related to the production of a product as opposed to daily operations. 

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Operating Expense Ratio:

The operating Expense Ratio (OER) is the cost to operate a piece of property compared to the income the property brings in. It is a very important ratio to use in real estate, such as with companies that rent out units. A low OER means that less money from income is spent on operating expenses. 

OER can also be used to gauge the difference in operating cost between two properties. 

For example, a company owns two plants in New Jersey, with similar outputs, and one’s OER is 12% more than the other, management must investigate the reason why this difference. 

Are Wages operating expenses?

In the wake of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the United States has conferred an additional $310 billion funding to the Paycheck Protection Program (PPP) that was almost running out of funds in April. The importance of PPP is ever-important in these times of economic uncertainty as PPP is one of the few opportunities that small businesses have to obtain forgivable loans to sustain employees on the Payroll services.

But, there are so many questions that are yet to be answered and cleared for entrepreneurs, especially in the light of the forgivable nature of the PPP loans.

Another burning issue here is the grey area, where many public companies confessed to having taken the PPP loan which was truly meant for small businesses with employees less than 500.

To contain such malpractices, the federal government has come out with the briefing that the authorities will audit any company that levies for loans more than $ 2 Million.

This blog will provide answers to all the commonly asked questions and queries related to the PPP loan and how it can benefit your business.

 Question 1: What costs are eligible for forgiveness under the PPP?

Answer: The actual forgivable part of the PPP is dependent on certain factors. These are based on the payments made and the costs incurred during the COVID-19. These are the costs that are eligible for forgiveness in the PPP loans:

Salary and wages or other     similar payroll compensations.

Payments that have been made     in the light of sick leaves.

Allowance for separation.

Payments made for group     health care benefits, including insurance premiums.

Retirement benefits

State or federal payroll     taxes

Please note that cash     compensations that exceed $100,000 are exempted from this excuse.     Additionally, the employer's share of the federal payroll taxes is also     exempted from being forgiven under the PPP.

 Question 2: What costs are not eligible for forgiveness under the PPP?

Answer: Although the PPP loan is a breath of fresh air for businesses who are trying hard to genuinely retain their employees, there are still certain costs that are exempt from being forgiven under the PPP loan. These are:

Payments made to independent     contractors.

Under the Family First     Coronavirus Response Act, there are qualified sick leaves and parental     leave wages. These, therefore, are exempt from the forgiveness under the     PPP.

If we take February 15,     2020, as the benchmark date; then any interest payments on personal     property, rent payments under agreements in existence, and utility     payments like electricity bills, etc. are also not permitted for     forgiveness under the PPP loan.

Question 3: What are the limitations of loan forgiveness?

Answer: There certainly are limits to forgiveness in the PPP loans. The first is that not more than 25% of the loan forgiveness can be linked to non-payroll costs. Additionally, proceeds directed towards advance up to $10,000 on Economic Injury Disaster Loan will also be deducted from the loan forgiveness amount.

There are two formulas to determine the forgiveness amount in the loan deduction. The FTE Method and the reduction in wages.

The loan forgiveness amount is subject to reduction by multiplying it by the following fraction. These are as follows: (This is known as the FTE method)

The numerator of which is     the average number of FTE employees per month employed by the borrower     during the covered period.

The denomination of which,     as elected by the borrower is:

 The average number of FTE      employees per month (from Feb 15, 2019, to June 30, 2019)

 The average number of FTE      employees per month (Jan 1, 2020, to Feb 29, 2020)

The second is the reduction of wages method. This method is applicable as follows:

Identify employees who did     not receive the salary at an annualized rate of more than $ 100,000 for a     single day in 2019.

Compare each covered     employee’s wages during the period to his/her salary during the first     quarter of 2020.

For an employee who is     covered, the salary is reduced by more than 25%, then you need to apply     the following formula:

 Multiply the first-quarter      wages by .75

 Subtract the result from      the covered period wages

The aggregated dollar amount     will reduce the loan forgiveness amount. 

 Question 4: What are the documents that you need to apply for forgiveness?

Answer: To receive the loan forgiveness, you need to comprehensively submit accurate copies of the following documents, complete and updated:

Documentation to verify the     number of FTE employees on the payroll. This also includes the payroll tax     filings.

Canceled checks, payment     receipts, and transcripts of accounts verifying payments of mortgages,     rent and utility payments.

You also need to submit an     authentication certificate from a representative of the business that     certifies that the information and documents submitted are accurate and     the amount that is requested for forgiveness, will help retain employees.

In addition to these, the     SBA can also ask you to submit additional documents to solidify and     authenticate your case. 

Question 5: Are large businesses with adequate sources of liquidity qualify for a PPP loan?

Answer: No, the essence of PPP loans was to help small businesses, retain employees, and sail through these financially crunching times of COVID-19 smoothly. If larger businesses, who have enough sources of liquidity take this PPP loan, then the small businesses will be crushed under undue competition. Hence, as per the federal laws, for any business that takes up a loan above $ 2 Million dollars, will have to undergo a complete audit. 

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What Does Your Business Need?

What is vendor reconciliation - definitely accounts related job. It’s part of accounts payable activity where one has to reconcile vendor balance in his books of accounts.

The vendor reconciliation process in AP is a procedure aiming to clear misstatements and errors that might’ve occurred during the period between the last reconciliation and the current date.

We usually carry out AP reconciliations as part of audit procedures during annual financial statements audit or other agreed-upon procedures. The focus is on ensuring accounts payable is neither under- nor overstated. The process is based on fraud risk assessment for the entity or its vendors, and we carry it out under the relevant audit standards (e.g., ISA here in Europe).

The aim is to make sure that all invoices, payment transactions, advances, and any other liabilities or accrued expenses, are correctly disclosed in the financial information of the company.

When performing the reconciliation procedures, there are a few types of reconciliation you can perform:

·         Reconciliation of Accounts Payable ledgers to General Ledger (AP module to Trial Balance);

·         AP reconciliation via confirmation letters sent to the vendors, in which they confirm their transactions and balances.

The first procedure can help us identify technical errors, as cases where an invoice was paid but was not closed correctly in the AP module.

The second procedure provides more assurance from audit and controlling perspective, as it relies on external information.

Even outside the premises of financial audits, local laws and regulations sometimes require regular AP reconciliations (and not only accounts payable). As an example, here in Bulgaria, companies are obliged under the Accounting Legislation to perform at least one annual “stock-take” on all assets and liabilities. One way we usually approach the confirmation of vendor balances is by sending confirmation letters to all our vendors.

It is also a good idea to do so, as anytime we undergo financial audits, the consulting firm always selects a few vendors with large balances and transactions to confirm. Having already communicated with these vendors, obtained their confirmation, and looked into any identified discrepancies, it gives us the information ready for the auditors.

It is essential to know that in some cases, vendors are unwilling to confirm balances, due to a variety of reasons, most often lack of time and interest.

A general ledger is the backbone to your accounting activities. Read the blog to know what it is, how to maintain & it benefits your business. Ever since business and trade continue to exist in the modern-day world, so do General Ledgers! Whether the mode to assemble one’s business financials was on an abacus, on paper, or in the current day world of computers; the general ledger has continued to be of importance regardless, the day and age you are in.

For every business, it is important to know the pivotal role played by a general ledger as it includes the culmination of all your financial reports and statements.

Businesses use ledgers to document the money that they are paying or are being paid to them.

What is General Ledger?

The general ledger summarizes all the information about your business. It includes all the company’s accounts and transactions and is the financial foundation of the business. The ledger is divided into 5 categories:

Assets

Liabilities

Equity

Revenue

Expenses

Therefore, the number of funds that were credited and debited to your business, get accounted for in General Ledger.

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What are the Different Elements of a Ledger?

Let us delve a little deeper into what are the different elements of a ledger.

Assets: Resources that are owned by     the business and that give out any value are known as assets. These     resources of values can range from cash, properties, inventory, and     equipment, etc.

Liabilities: Things like taxes, employee     wages, mortgages, etc. come under the category of liabilities. These     include the future financial debts any business has to pay.

Equity: This involves the difference     between the assets and liabilities of a business. If the proportion of     liabilities in excess to that of the assets, then that is known as a case     of negative equity. An inverse situation is known as positive equity.

Revenue:  The income that a business     earns through the sale of its products and services is known as revenue.     These include sales, royalties, or any other earnings that a business     makes.

Expenses: When a business pays in     return for services and products that are purchased are known as expenses.     These include rent, travel expenses, etc.

Reasons Your  Business Needs a General Ledger:

The general ledger is a culmination of all your financial reports. It is a reflection of the financial position of your business; there are many reasons as to why it is important for your business to keep a general ledger:

It includes the accurate     financial transactions of your business.

It helps you balance your     books by giving you a complete understanding of where you need to pay more     attention.

Filing taxes becomes easy     when all your transactions are in one place for you to work on.

It helps you spot unusual     transactions and potential fraud easily.

It helps you analyze key     financial statements that help you with assessing your profitability, and     overall financial health promptly.

Suggested Reads - Why Bank Reconciliation is Important?

What is the Difference Between General Ledger and General Journal:

There are many instances where the general ledger and the general journal are confused with each other. Where the former is a summarization of all the financial information of your business. The latter keeps a record of all the transactions made in the business.

The various financial transactions as they occur through the day are recorded in the general journal. In addition to that, when the financial transaction occurs and the source document for the same is generated, then it is recorded in the general ledger.

General Ledger and Double Entry Bookkeeping:

There are two branches of accounting, the single account method, and the double-entry bookkeeping method. The former works fine if your needs from your accounting activities are limited. Whereas, double-entry bookkeeping every transaction affects two accounts at the least. One that is debited and the other that is credited. The two should always be balanced, i.e. the total debit amount= the total credit amount.

A general ledger is used to summarize all the transactions that are recorded in the double-entry bookkeeping system.

The Backbone of Accounting Financials: 

The general ledger is used to record all the company’s assets, liabilities, revenue, expenses, and equity, etc. These are then required to build and collate the balance sheet and income statements. All these together form the backbone of the accounting needs of any organization.

Wrapping Up: 

The Ethical Accounting Turns Away Bad Business to Remain a Priceless Addition to Any Business

What would you do if one of your clients owed a huge amount of money in back taxes and they subsequently asked you to delete their QuickBooks® file, create a new one under a false name with no liabilities on the books and tell their creditors that they had moved out of the country?

That may seem pretty far-fetched, but the shocking truth is that this actually happened to a bookkeeper at our firm. While situations as outlandish as this one probably don’t come across our paths every day, the reality is we are all faced with having to choose, on some level, between ethically sound practices and retaining revenue that pays our bills!

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So, where do we draw the line? As a business in a highly competitive marketplace where the lowest price always seems to win, how do we make the hard decision to turn down revenue because we simply can’t comply with an unethical request of a client? In this case, I think it is helpful to keep your end goal in mind. As bookkeepers and accountants, we are not just working to deliver a P&L, but we are also working to see small businesses and entrepreneurs equipped to thrive in their markets. By doing this, we get to participate, firsthand, in the building of stronger communities. We want to create an amazing experience for our customers and command fair rates for our service.

If these are our goals, then it’s important to build a brand that operates with integrity in every aspect. By doing this, you communicate to your clients that they can trust you with their business – which often represents their blood, sweat, tears and dreams, not to mention the largest asset on their personal net worth statement. They can be confident that you have their best interest in mind, that you, yourself, refuse to tarnish your own brand and that you won’t allow them to make decisions that will hurt their own integrity. Many times, clients don’t know what’s legal or illegal to do; it’s our job, as accountants, to protect them!

While there may be potential loss of revenue when you refuse to write something off – just like the shady guy next door used to – you are really doing your business and sales efforts a huge favor! A bad reputation spreads faster than a good one, so it’s better to be known by a few good people in town as trustworthy than known by everyone as the shady accountant who will do anything for a buck.

As accountants and bookkeepers, we need to be known for our strong moral compass, if we are to remain valuable in the workplace. The reality is that technology will continue to improve in a way will make data entry irrelevant. IBM’s Watson is already doing the heavy lifting for understanding the tax code, and QuickBooks Online has resources for business owners to participate in the bookkeeping.