Fearless accounting with Wave
Master your accounting and steer your business to success with the world’s most popular free accounting software. Copyright © 2018 Wave Financial Inc. Unlimited copying, redistribution, and use of this guide in its original format is permitted for educational purposes, and for the purpose of assisting business owners in their use of Wave within their business. Sub-sections of this guide, and/or the concepts and explanations herein, may be reproduced and distributed subject to the condition that the original source is attributed to Wave Financial Inc, and a link or reference provided to Wave at https://waveapps.com. Notwithstanding the above, no part of this guide, nor the concepts or explanations herein, may be reproduced, repurposed, or redistributed in connection with, or for the purpose of promoting the use of any other accounting or financial software or service.
Disclaimer Wave Financial Inc. has provided this guide to assist business owners in maintaining and understanding their own management accounts using Wave’s online financial tools and services. The activities and methods set out in this guide are not intended to be used for statutory financial reporting or tax calculation and Wave Financial Inc. makes no representation as to their suitability for these purposes in any jurisdiction. While Wave Financial Inc. has taken reasonable care to ensure the accuracy of information in this guide, it is provided as-is and without warranty as to the suitability of the content for any individual business. Wave Financial Inc., together with its Directors, Officers and employees, accept no liability for any direct or indirect financial or economic loss that may arise as a consequence of using this guide.
1 We’re glad you’re here!
Welcome to Wave’s Fearless Accounting guide, and congratulations on opening a document that says “Accounting” on the front!
We know that accounting – like math – is a topic that most people were turned off from before they even left school, but hopefully this guide will show you not just how easy it is to look after your own accounting in Wave, but also how having a good grasp of your numbers helps you understand and improve your business.
Of course, you can have someone else do your bookkeeping, but we firmly believe that – at least until your business grows so successful you have no time for it – the benefits that flow from looking after your own books more than justify the effort of learning how!
The Wave Customer Success Team
2 About this guide
This guide is designed to be read Good accounting and bookkeeping practices “But I don’t know anything about once, and referred to often. have a natural rhythm. accounting!” You need to set up your accounts before If that’s you, don’t be concerned. We’ll Seriously, you’ll get the most benefit you can use them. Once that’s done, there quickly cover the basic accounting concepts if you read it all the way through, are some routine tasks you’ll probably want that will help you use Wave successfully. to perform daily; others weekly; and others starting at the beginning, and But goal is not just to show you how to use monthly, or even quarterly. continuing to the very end! Wave; we want to make you comfortable Finally, once a year, you’ll need to complete using financial information to understand Here’s the good news, though: you year-end tasks to be ready for tax time. your business, make better decisions, and become more successful. don’t need to read it all in one go! We’ve designed this Fearless Accounting guide to follow a similar cycle. Start by So when you get to the Accounting coffee reading just what you need to get set up break sections – grab a coffee! Give correctly; then learn the simple tasks you’ll yourself a few minutes to gain true perform daily or weekly in Wave. Later, you’ll understanding of accounting concepts and discover best practices to follow monthly tools that help ensure your success in Wave, and quarterly. Save learning about year-end and in your business! tasks for, well, the end of the year! If you jump to the end of this guide, you’ll Ready to do this? Let’s go! find a comprehensive checklist of every task covered here. Print it out and keep it somewhere handy. It’s your to-do list for staying in control of your accounting, and your business.
3 The sections below cover a lot of content. To track where you are, refer to Table of contents the icon on the top right corner of each, and use the checkbox next to it to record your progress. page page page page page 5 16 24 29 43 Accounting coffee break: Putting it into action: Accounting coffee break: Putting it into action: Accounting coffee break: The 10,000 foot view Getting set up Why the balance sheet Daily to weekly tasks Journals and ledgers balances page page page page page 48 55 62 78 87 Accounting coffee break: Analyzing your business: Putting it into action: Accounting coffee break: Put it into action: Understanding debits & Interpret your financial Weekly to monthly tasks Your business over time Monthly + quarterly tasks credits statements page page 97 111 Year-end accounting Comprehensive checklist
4 ACCOUNTING COFFEE BREAK #1 The 10,000 foot view Check off your Three reasons to progress as you go! keep accounts
Compliance Account to owners Understand & grow your business
If you run a business, you need to You’re probably reading this guide to This is the main focus of our guide, and report your income and pay taxes. tackle the accounting for your own we believe it is the best and most Depending upon where you operate business, but another important reason compelling reason to gain a solid your business, and what business many businesses need proper understanding of fundamental structure you adopt, you may also need accounts is to account to owners. In accounting concepts, and to handle your to file accounts that are available for any incorporated business with own management accounting. official or even public inspection. The investors, in any partnership, and any law requires you to keep appropriate private business where managers are Being in charge of your numbers means accounts of your business transactions, employed to look after day-to-day being in charge of your business, and that so that the man can get his piece of the operations, the owners need to know gives you the power to plan a path to action. what is being done with their money, success. and how it is generating profits.
6 Let’s repeat that. Financial accounting takes your Management management accounting records and The main focus of this guide is to re-purposes them to report your tax accounting, provide you the accounting knowledge liabilities, and to file information and you need to understand and grow your make reports to owners in compliance business, and the practical steps and with applicable laws and standards. It not financial skills in Wave to handle your own is about complying with local management accounting. regulations where you operate your accounting This is super important. Management business. accounting is mostly intuitive, easy to Financial accounting is not easy to learn, and the same wherever in the learn, which is why your CPA spent so world you run your business. long in school, and charges you so Management accounting is about much! documenting how your business Here’s the good news: just about works, so you see early warning signs everything you need in order to of problems, and clear insight into understand your business and be more opportunities. successful falls under management Every business owner can and should accounting. And not only is it fine to master the basics of management leave your business’ financial reporting accounting – it won’t be hard to learn, to your accountant (seriously - do and it will make you more successful. this!), his or her services will be much less expensive if you have your core management accounting records in good order.
7 The balance sheet and income statement
(aka “P&L”) If you were exposed to any accounting At the risk of repeating ourselves, as a classes at school or college, or have small business owner you keep dipped into other accounting books, accounts to better understand your you may have painful memories of business, and the two most important T accounts, journal transactions, and financial statements that you’ll rely on debit-credit theory. - the ‘end’, or output of your work - are your balance sheet and your income Well, we may meet some of that along statement (also known as your profit the way, but let’s start in a more and loss report). sensible place: at the end! So let’s dive straight in and take a look at how these actually work, using just one sheet of paper…
8 Imagine for a moment there are What I have What I earn no easy, free accounting systems like Wave. Instead, we’re going to What my business has What my business makes give you one sheet of paper to track your business.
To help you get started, though, we’ll add a few headings:
On the left, we’ve made space to list out “What I have.” That’s made up of three less What my business owes less What my business spends sections: 1. What my business has 2. (take away) What my business owes 3. (equals) What’s left for me
On the right, we’ve made space to list out “What I earn”. That’s also made up of three sections: equals What’s left for me equals What’s left for me 1. What my business makes 2. (take away) What my business spends 3. (equals) What’s left for me
Read on, and let’s see how these six simple headings give us space to record everything we need to keep track of our business.
9 1. Initial investment What I have What I earn Let’s say we’re starting a web design business. We have $5,000 of personal start- up capital to get us going. What my business has What my business makes
Whatever business you’re running, it’s a Bank: $5,000 really good idea to set up a dedicated bank account for everything to do with your business, separate from your personal spending. So let’s go ahead and deposit our $5,000 start-up capital into our shiny new business bank account. less What my business owes less What my business spends How would we record this on our one- sheet accounting system? Well, the business now has $5,000 in the bank, so we can write that in under What my business has. Bank: $5,000 equals What’s left for me equals What’s left for me And we don’t owe anyone else any money, so that means What’s left for me must also Owner’s Investment: $5,000 be $5,000. And we know that $5,000 was our original investment. Owner’s Investment: $5,000 Here it is, written up in our notebook:
10 2. Rent payment Next order of business – somewhere to work and meet clients. We’re budget minded, so we set up shop in a co-working What I have What I earn space that charges $800 a month in rent. What my business has What my business makes Look at the right side of the page. Rent is an expense, so we’ll record it under ‘What Bank: $5,000 my business spends’: Rent: $800 - $800 = $4,200 We haven’t made any money yet, so our business is showing a loss. We’ll write that down at the bottom on the right, under less What my business owes less What my business spends ‘What’s left for me’:
Profit (Loss): ($800) Rent: $ 800 Note: Parentheses (like this) are one way of showing a negative number. On the left side, we’ve paid the rent out of our business bank account, so we’ll need to go ahead and deduct $800 from there, equals What’s left for me equals What’s left for me bringing the balance down to $4,200. We still don’t owe any money, so ‘What’s Owner’s Investment: $5,000 Profit (Loss): ($ 800) left for me’ should also total up to $4,200 – and it does, so long as we remember that What I’ve earned: ($ 800) our profit (or loss) on the right hand side also belongs to us. So let’s finish up and $4,200 record: What I’ve earned: ($800) Here’s how our page looks now:
11 3. First sale We’ve invested some cash into the business; we have office space; and now we have our first sale! Our first customer has What I have What I earn signed on the dotted line, and handed over a check for $3,500. What my business has What my business makes
It’s tempting to pin that first ever check to Bank: $5,000 Sales: $3,500 the wall as a memento, but let’s be smart and stick it in the bank! - $ 800 = $4,200 We’ll add it to bank, bringing our running balance up to $7,700. + $3,500 = $7,700
We also now have some income to add less What my business owes less What my business spends under the ‘What my business makes’ section. Rent: $ 800 Sales: $3,500 As we saw when we paid Rent in Step 2, this will also affect our profit/loss, and in turn feed into ‘What’s left for me’ on the left. equals What’s left for me equals What’s left for me As you can see, our accounts are still looking nice and logical: Owner’s Investment: $5,000 Profit (Loss): ($ 800) • What my business has, less what it What I’ve earned: ($ 800) + $3,500 = $2,700 owes, is what’s left for me which is + $3,500 = $2,700 • My Owner’s Investment, plus what my $7,700 business has made, less what it has spent.
12 4. Purchase on credit We’ve worked with five of the six headings. Let’s do one more transaction that will use the sixth. What I have What I earn Let’s say we decide to commission a logo for our new business. A local graphic What my business has What my business makes designer does this work, and invoices us $500, due in 30 days. Bank: $5,000 Sales: $3,500 This is also an expense, so on the right hand side of our notebook we’ll add it - $ 800 = $4,200 under ‘What my business spends’: Design Services: $500 + $3,500 = $7,700
As usual, when we make or spend money, less What my business owes less What my business spends our Profit changes, and that flows through into the bottom of ‘What’s left for me’ on Accounts Payable $ 500 Rent: $ 800 the left side. We also need to note how we’ve paid for Design Services $ 500 the logo design – except we haven’t paid! Unlike when we paid for Rent from the $1,300 bank, we’ve been given 30 days to pay our designer. This means our business equals What’s left for me equals What’s left for me currently owes $500. This is a vendor ‘account’ that we’ll pay in the future, so we Owner’s Investment: $5,000 Profit (Loss): ($ 800) can enter: What I’ve earned: ($ 800) + $3,500 = $2,700 Accounts Payable: $500
Now the left side adds up again. What the + $3,500 = $2,700 - $ 500 = $2,200 business has ($7,700 in the bank), less what it owes ($500 ‘Accounts Payable’) - $ 500 = $2,200 equals what’s left for us: $7,200, made up of our original $5,000 investment, and $7,200 $2,200 profit.
13 Up till now, we’ve recorded transactions Financial Statements: My Web Design Co. under six headings on just one sheet of paper. Balance Sheet Income Statement (“P&L”) We’ve been calling the two sides “What I have” and “What I earn”, but as you may Assets Income have guessed, these two sides are exactly what go into creating the Balance Sheet Bank: $5,000 Sales: $3,500 and the Income Statement. Here’s where we ended up a page ago, but - $ 800 = $4,200 replacing our ‘business owner’ words with ‘accountant’ words: + $3,500 = $7,700 On the left, our ‘Balance Sheet’ comprises: Liabilities Expenses • Assets (what our business has) • Liabilities (what it owes to other people) Accounts Payable $ 500 Rent: $ 800 • Owner’s equity (what’s left for us)*
Design Services $ 500 On the right, our ‘Income Statement’ shows: • Income (what our business makes) $1,300 • Expenses (what it spends)
Owner’s Equity Profit (Loss) • Profit or Loss (what’s left for us) Modern accounting software, such as Wave, Owner’s Investment: $5,000 Profit (Loss): ($ 800) will usually create a Balance Sheet and Income Statement with a bit more detail Retained Earnings: ($ 800) + $3,500 = $2,700 than this, but fundamentally this is all there is. If you’ve followed along this far, you + $3,500 = $2,700 - $ 500 = $2,200 should now have the understanding to read your financial statements with confidence! - $ 500 = $2,200 * Note that under Owner’s Equity, we’ve also changed ‘What I’ve earned’ to ‘Retained Earnings’, because that’s what $7,200 accountants call it!
14 As you’ve seen, there’s no magic about Today, of course, accounting software No, you can’t the Balance Sheet or Income like Wave handles nearly all of this Statement. automatically, but the fundamental principles and methods remain the really keep The Balance Sheet details what the same. The huge benefit that accounting business has, what it owes, and what’s software offers (other than saving an left for you and any other owners. your accounts enormous amount of time recording and The Income Statement records income, copying-out transactions), is that on one page! expenses incurred to generate that everything is instant. income, and the profit available to the Whereas all the copying and owners of the business. summarizing meant that in the world of They’re connected because profit paper accounts, you could only available to the owners of the business reasonably produce financial will end up in the Owners’ Equity statements once in a while, with Wave section of the Balance Sheet. the Balance Sheet and Income But seriously – with all those notes and Statement update every time you record crossings-out, who could make sense a transaction. of either report? If you are interested in really That’s why, ever since modern understanding how your accounting accounting practices developed at least works, this is a neat thing to do: 600 years ago, people have written the generate your Balance Sheet and details of transactions as they’ve taken Income Statement in Wave; add one place into stand-alone date-ordered transaction; and generate them again. lists, called Journals; cross-posted You’ll see movements exactly like we them into separate lists that are have illustrated in our one-page organized by account, called Ledgers; examples above. and then copied summarized totals from the Ledgers into the Income Statement and Balance Sheet.
15 PUTTING IT INTO ACTION Getting set up Putting it into action
We’ve got our first Accounting coffee The next few sections lay out all the tasks You should find that, by the end of our time break under our belt, but as with you’ll ever have to perform in Wave, some together, you perform the tasks we’ve laid financial metrics to help you better analyze out not because we’ve explicitly said that learning anything, all the theory and your business, and a few more “accounting they should be performed, but because coffee in the world isn’t going to do coffee breaks” sprinkled throughout. You’ll each task is a natural extension of your us any good until we put it into be able to breeze through some of these understanding of accounting, and of your coffee breaks in a single cup, while others business. Every step we’ll take is one step practice. From here on in, we’re might require a full pot. The bookkeeping closer to a set of meaningful books that will going to be splitting our time tasks themselves are designed to be help you better understand your business, between learning a few key cyclical; once you’ve set yourself up for and drive its growth! accounting principles, and seeing success, you can continue to use what you’ve learned on a day-to-day, week-to- Let’s get started… how they all shake out in Wave. week, quarter-to-quarter, and year-to-year basis.
17 Getting started
Wave’s signup process is designed to Signing up for Wave is easy! If you haven’t Because we want to focus on organizing our be as quick and easy as possible. In already, simply visit www.waveapps.com, and finances, let’s start there! click Create your Free Account. fact, you’ve likely signed up before even reading this – so welcome! Sign up using your main business email Congratulations! You now have a address, or you can sign up with your Google new Wave business. Let’s start filling In this section, we’re going to go account if you have one. it with useful information! beyond the initial signup, and help Next, tell Wave your Business Name, and you get set up the right way, with the choose the Business Type that looks most like bookkeeping processes that we’ll what you do. This will help Wave start you off cover later in mind. with income and expense categories that should cover most of your needs.
Tip: Have a dedicated business bank account! Your accounting is so much easier if you have a separate business bank account. If your business is incorporated, or you need to write or receive checks in your business name, this will need to be an account that your bank explicitly offers as a “Business bank account.” But if you’re a sole proprietor and don’t need to send or receive check payments in your business’ name, then you can use a separate personal bank account. Follow this golden rule: do not mix personal and business transactions in the same account. Note: If you have more than one credit card, keep one just for business purchases, too.
18 1. Enter your bank accounts
Nine simple Head over to the Chart of Accounts page, which is under Accounting on the left menu setup steps in Wave, and add your bank account(s) in the Assets tab.
You’ll also want to add accounts for any Credit Cards you’ll be using for your business, which you’ll do on the Liabilities & Credit Cards tab.
2. Get transaction data into Wave
If you bank with one of the 10,000+ banks Wave connects to, go to Banking > Bank Connections to import up to 3 months’ historic transactions. (This will also keep your transactions up-to-date going forward!)
If your bank is not supported with a direct connection, or you also need to import older If you’re the kind of person who data, you can export transactions from your online banking website and upload the into likes to set up your workspace Wave from the Transactions page. before beginning, we’ll have you up and running in no time. 3. Set Wave to suit your brand If you’re not, don’t worry. You can Click on Sales > Invoices. If this is your first skip these steps for now and time on the Invoice page, you can upload your logo and pick an invoice layout and color that complete them as you continue suits your brand. You can update this any time using Wave. under Settings > Invoice Customization.
19 4. Add sales taxes
If your business will charge or recover Sales Taxes, go to Settings > Sales Taxes to define any taxes you will use. Important: Sales Taxes cannot be changed after you’ve started to use them, so double- check to be sure you’ve entered them right!
5. Add products & services
Go to Sales > Products & Services to create a list of the Products / Services that you will be supplying to customers. (You’ll use these to create invoices.)
You’ll see that you can associate an Income account (category) to each Product / Service, and also set the default Sales Tax.
6. Add customers
Go to Sales > Customers to start entering details of your customers.
Note that you can also bulk import customers to save time.
Tip: If you decide to use Wave Payments, you or your customers can also record payment card information for repeat billing.
20 7. Set up online payments
Your new Wave business will automatically provide your customers the ability to pay you online for any invoices that you send. Once you’ve received your first payment, you’ll be asked to fill out a brief application so that Wave knows a bit more about you, your business, and – of course – where the money should be deposited! You can fill this out before sending your first invoice: head over to Sales > Payments and click Finish Payments Setup. (For Canadian business owners, go to Sales > Payments and click Turn on Payments before accepting your first payment.)
8. Sign up for payroll
If your business has employees, click on the Payroll menu to set up Wave Payroll. Answer a few basic questions about your business and setup will be customized to your business’s needs.
Tip: Make sure you have all tax information for your business on hand, as well as any information for payrolls you’ve run earlier in the year. This will streamline the setup process,. You’ll be paying your employees right alongside handling your invoicing and bookkeeping in no time!
21 9. Enter starting balances
If you’re moving over to Wave from another accounting system, you’ll want to enter your account balances from the previous system:
1. Giving yourself a pat on the back for choosing Wave 2. Entering a starting balance transaction
Get the starting balances from your previous system in the form of a Trial Balances report.
Before adding your starting balances, go to Accounting > Chart of Accounts, and add any accounts from your previous system that don’t yet exist in Wave.
Once this is done, all of your starting balances can be added to the biggest journal transaction that you’ll ever create in Wave. Just recreate each line of the Trial Balances report by clicking Add Debit or Add Credit and selecting the appropriate account and amount. After this monster journal transaction has been saved, you’re good to go!
Tip: If you have any outstanding bills or invoices in the accounting system that you’re coming from, recreate them in Wave and then delete them from the old system before generating a Trial Balances report.
22 Setup checklist
Sign up with Wave!
Set up a separate, business bank account with your bank
Enter your bank accounts
Get transaction data into Wave
Set Wave to suit your brand
Add sales taxes
Add products & services
Add customers
Sign up for online payments
Sign up for payroll
Enter starting balances
23 ACCOUNTING COFFEE BREAK #2 Why the balance sheet balances Rather than just telling you what ‘The Now, if you had a ‘magic’ business that The accounting Accounting Equation’ is all about, let’s had no operating costs, all the money dig into Why the Balance Sheet that flowed in from these three equation Balances. sources would be sitting in your bank account (an Asset on your Balance If you think about all the money and Sheet), or perhaps turned into other other assets in your business at any assets - things you had purchased and Most accounting guides focus on point in time, they must have come retained in the business. In the real helping you learn accounting rules. from somewhere. But where? world, however, at least some of that The problem with learning rules is The money in your business can money is going to have to flow back that they are just as easy to forget. have come from only three places: out of the business. That’s why our goal here is to help 1. Investment that you, the owner That outflow can only have gone to you understand at a fundamental (and any other co- two places: owners/investors), put into the level how - and why - accounting 1. It has been spent on goods and business. “works.” Understanding is both services to operate the business* more useful, and harder to forget! 2. Income that the business has (“Expenses”). earned, right back from when it 2. It has been withdrawn by you, the started. owner. 3. Money or things that we’ve So if we know the only three places borrowed from other people - i.e. money can have come from into your what the business owes to others, business, and the only two places it which we call Liabilities. can have gone, what can we do with (Sometimes your business may receive that information? Let’s take a look… gifts, in the form of government grants; let’s keep it simple and just include these as ‘income!’) * Note: Tax is also an Expense, even though it might not feel like it directly helps you operate your business!
25 Let’s stop the clock and think about the source of the Assets in your business right now. Can we agree that all the money that has ever come into the business is still in the business right now as Assets in one form or another, or it has gone out of the business to pay for expenses, or been withdrawn by the owners? Awesome! Let’s start turning this into some ‘math’…
Owner’s Lifetime Lifetime Owner’s Assets = + + Liabilities - - Investment Income Expense Withdrawals What other What the All the money What owners people have All the All the income owners have and value of have put into the provided to the expenses the the business has taken out of ‘things’ in the business since it business, and business has ever earned the business business today started are owed right ever incurred since it started now
Still with us? OK. Let’s reorganize this a bit:
Owner’s Owner’s Lifetime Lifetime Assets = Liabilities - - + { Investment Withdrawals } + { Income Expense }
What other All the money people have and value of What owners have put into the put into the All the income the business has ‘things’ in the business since it started, less what business, and ever earned, less all its expenses business they’ve taken out are owed today right now
Nearly there! Let’s simplify this some more...
26 Let’s just call all the Owner’s Investment less all the Owner’s Withdrawals “Owner’s Net Investment”. And, of course, all the Income the business has earned less all its Expenses is, simply, the business’s total Lifetime Profit up to today. So here’s the equation once again, with these changes:
Owner’s Net Lifetime Assets = Liabilities + + Investment Profit What owners What other have put into All the money people have put All the income the business and value of into the the business has since it started, ‘things’ in the business, and ever earned, less less what business today are owed right all its expenses they’ve taken now out.
Take a look back, now, at the simple ‘one page’ financial statements starting on page 9. Do you see how each time we recorded a Profit in the Profit & Loss Report, we added it to ‘Retained Earnings’ over at the bottom of the Balance Sheet? “Retained Earnings” is simply accountant-speak for Lifetime Profit, from when the business started right up to the date of the Balance Sheet. So we can rewrite our equation again:
Owner’s Net Retained Assets = Liabilities + + Investment Earnings What owners What other have put into All the money people have put the business Accountant- and value of into the since it started, speak for lifetime ‘things’ in the business, and less what profit* business today are owed right they’ve taken now out.
* Technically, in an incorporated business, Owners’ withdrawals normally are made from Retained Earnings, rather than reduction of Owner’s Investment. That’s what the ‘Retained” in “Retained Earnings” means: “Retained” as opposed to “Paid Out”. Mathematically, however, this distinction is unimportant, so let’s not get hung up on it for now.
27 In formal accounting terms, Owner’s Investment and Retained Earnings are both components of Owner’s Equity (“OE”). This is an unfortunate choice of words, and confuses many business owners because of its similarity to “Equity”, which is a class of capital within the funding structure of an incorporated business. However, we are stuck with it, so let’s make a final simplification to our formula: Owner’s Assets = Liabilities + Equity What other All the money people have put Owner’s and value of into the Investment, ‘things’ in the business, and together with business today are owed right Retained Profits now
Accountants call this “The Accounting Equation”, and as you can see it exactly maps on to the Balance Sheets that we have been working with so far:
What my business has What my business has is equal to less What my business owes What my business owes or, more intuitively: plus is equal to What belongs to me What’s left for me (the owner)
Remember, we haven’t learned the Accounting Equation as a ‘law’ here. We’ve worked it out together from first principles, by thinking about all the places money can come from in a business, and all the places it can go. There’s nowhere else money can come from or go to, so the Accounting Equation has to be correct, and Balance Sheets must always balance!
28 PUTTING IT INTO ACTION Daily to weekly tasks By the end of this section you’ll know how to…
Capture receipts Upload photos of your receipts and store them in Wave.
Invoice clients Use Wave’s Invoicing feature to send invoices to your clients and get paid. Record and categorize transactions Track your transactions and categorize them appropriately.
Record business mileage Log business use of your vehicle outside of Wave.
Record invoice payments Record payments received for your invoices.
Record bills Record any owing bills.
Record non-income and non-expense transactions Account for any deposit and withdrawal transactions that aren’t strictly income and expenses.
30 Capture receipts
Whenever you incur a business Keeping digital copies of your receipts goes Wave provides three options for uploading expense and receive a receipt, it’s a beyond simply accounting for the expenses your receipts: direct upload, email, and that they represent. Receipts provide a real- mobile upload. As long as the receipt is in a great habit to snap a picture of it world document of your purchases. If you supported image file format, Wave will immediately and upload it to Wave want to claim something as a business attempt to read the receipt and pre-fill as so that it can be accounted for expense, it’s good practice to have the many of its fields as possible. related receipt on hand. properly. Once the receipt is verified, a transaction In the interest of planning for the worst (the recording the associated expense will be Wave provides free mobile Receipts worst being an audit come tax time), posted to your Transactions page. apps for Android and iOS devices, receipts act as a control to keep your Tip: Use the Notes field to record any which you can download from the accounts as air-tight as possible. Once a receipt is uploaded and verified, Wave will details about the receipt. If you took a client to dinner and uploaded the receipt, relevant app store. automatically bookkeep the purchase for be sure to make a note of the business you. purpose of the meeting, as well as who was there.
31 Invoice clients
Now to the bread and butter of your Once you’ve pre-filled your account with Now all you have left to do is Approve and business: getting paid for your work! your Customers, Sales Taxes, and Send the invoice to your customer. Products and Services, you’ll find the Remember to enable online payments so process of creating and sending invoices just To bill a customer for a service or your customers can pay you directly from about as straightforward as it gets. Go to product, you’ll need to create an the emailed invoice that they receive! Sales > Invoices and click on Create an invoice. Creating and sending an Invoice. invoice in Wave takes just a few Select Add a Customer at the top of the clicks, either online or in the Invoicing Tip: When you first Save an invoice, Wave will page to choose from one of your saved create it as a Draft. This means it is not yet mobile app. customer profiles. You can also add a new recorded as part of your income. one if needed directly from the page. As long as you have Payments by The moment you click Approve on a draft The same goes for your products and invoice, Wave will take care of the necessary Wave enabled, credit card payments services; just click on Add an Item to choose bookkeeping automatically: Accounts can be in your bank account within from one of your saved products and Receivable will be debited by the full invoice just a couple of business days. services or create a new one. amount, and Sales will be credited. If there is any Sales Tax on the invoice, Wave will credit Everything integrates with your Apply sales taxes to any items that need your Sales Tax account the correct portion of them; set the payment terms for your invoice the Invoice. Wave accounting, and designed to at the top of the page; and click Save. be as effortless as possible.
32 Categorize transactions
Spend some time every time you log The categorization process consists of 3. Review: Once a transaction has been in to Wave to make sure that each these steps: categorized and tax has applied, review it to make sure everything 1. Categorize: Apply a category to the and every transaction in the checks out before marking it as transaction that most appropriately reviewed. (You can un-mark or edit Transactions page is categorized. describes the real-world transaction your reviewed transactions at any that took place. If you spent $200 on a When you categorize a transaction, point.) meal with a client, then when the you’re telling Wave how to bookkeep transaction for that meal is imported your income and expenses, so that into Wave, it should be categorized Adding Categories: under Meals & Entertainment. you get useful reports to understand The ‘Categories’ you’re offered when your business. 2. Apply a Sales Tax: After a transaction categorizing transactions are simply has been categorized, it may then be accounts that Wave has created for your An uncategorized transaction should necessary to add a sales tax. If your use, based upon the business type you be seen as incomplete; it needs to be business is registered to charge and chose when getting started. categorized and reviewed if it is recover sales taxes, make sure that the If you want to add more Categories, go to going to accurately contribute to correct sales tax is applied to each Accounting > Chart of Accounts, and transaction. your reporting. create your own in the relevant sections.
33 Log business Dat Busines Person e Trip Start End s al 1 Visited Acme Corp. mileage 15,100 15,160 60 Feb Tulsa 1 Grocery run 15,160 15,171 11 Feb
Logging mileage is not a feature of 2 Feb School run 15,171 15,185 14 Wave, but it’s an important daily Site visit @ 131 West 3 Feb 15,185 15,230 45 task to keep your business records St. in good order, so we’re calling it out 105 25 here. 130
If you own a vehicle and use it in While logging business mileage is not It’s a great idea to check with your both your business and your personal essential for your management accounting accountant, or Google for local rules, what life (whether you or the business (you could simply estimate your business vs the minimum required information is to technically owns the vehicle), then personal mileage, and apply whatever split keep, but you can’t be wrong for keeping too you feel is right in your management detailed records, so if in doubt, keep a while some of its costs should be accounts), when it comes to tax time, notebook in your car and record the recorded as a business expense, it’s having good records of business and following for every trip: personal mileage is essential. unrealistic to consider the whole cost § Date a business operating expense. Different countries and regions have § Trip details (from/to) different rules for how you calculate and § Starting mileage The most logical way to decide how deduct driving expenses for tax purposes, § Miles driven (or Kilometers!) much cost relates to the business and but just about everywhere, if a vehicle is § Ending Mileage how much to you personally is used for Business and Personal purposes, § Purpose of trip usually on the basis of business vs you’ll need to be able to evidence the two § Business or Personal categories of mileage. § Customer (if applicable) personal mileage.
34 Record invoice payments
If you receive payment for your To record payment directly to an invoice: To record an invoice payment using an already-imported income transaction: invoice by check, or a payments 1. Go to Sales > Invoices. You’ll be greeted processor other than Payments by by a list of your unpaid or partially paid 1. Locate the uncategorized payment invoices. transaction in the Transactions page. Wave, you’ll need to record the 2. Locate the invoice that you are 2. Open the Category dropdown menu payment manually in your recording payment for; click the arrow and select Payment Received for an bookkeeping. to its right, and select Record a Invoice in Wave. This will bring up a list Payment. of any outstanding invoice amounts. When a payment has been recorded correctly, you will be left with a 3. Enter the Payment date, Amount, 3. Select the related invoice from the Method, and Account. Click Save. dropdown menu. This will link the Deposit transaction in the transaction to the invoice, and mark the These steps will create a new Deposit invoice as paid. Transactions page that is linked to transaction linked to the invoice, so if you the invoice itself, marking it as paid. have connected a bank account, or have uploaded transactions, you could find yourself with duplicate payments in your Tip: What happens if you get paid by check on a Friday, but the check doesn’t clear until Transactions. Monday? You can prevent this delay from Simply go to Accounting > Transactions throwing your books off by using a Money in and delete the duplicate transaction. (Note: Transit Account. You can check out the process here: http://bit.ly/transitpayment be careful to delete the ‘unconnected’ duplicate transaction; not the transaction linked to the Invoice that you have just added!). 35 Receive invoice When your customers pay invoices Automatic bookkeeping with Payments by Wave: payments via Payments by Wave, you receive payment quickly straight into your Remember – this process is automatic; you automatically don’t have to do anything. But if you’d like to bank, and all the bookkeeping is keep an eye on things, here’s what you’ll see taken care of automatically! on your Transactions page as Wave ”does its thing”: Here are some of the things that Wave takes care of, so you don’t have to: 1. When your customer pays an invoice online, you’ll receive a notification email, • The invoice is marked ‘paid’. and see a deposit transaction on your • The payment transaction is recorded, and Transactions page. The account will booked to a dedicated Payments by be set to Payments by Wave. Wave holding account. 2. If you have a bank account connected or • The Accounts Receivable balance is are uploading transactions, a deposit reduced. transaction will be imported once the payment hits your bank account. • Card processing fees are accurately accounted for. 3. Wave will automatically detect the deposit transaction and create a • When funds are deposited into your bank transfer from Payments by Wave to and appear in your automated your bank account. This will appear on transaction import (for connected bank the Transactions page as a transfer accounts) or upload, they’re matched transaction. with a transfer from the holding account. You might receive several invoice payments This process was designed to keep your in a single funds transfer from Wave. No bookkeeping as accurate as possible, while problem – Wave knows how to match the taking the work out of recording invoice deposit against multiple individual payments via Payments by Wave. payments.
36 Record bills
Record any expenditures that you’ve Creating a Bill in Wave will correctly account Here’s a simple rule of thumb: for any expense that does not have to be been billed for, but have not yet paid, • If you pay for a service at the time you paid right away. as Bills in Wave. consume it, you might as well record it Is rent coming due? Have you been billed for then and there as an expense transaction Short term liabilities related to your internet? Has a contractor sent you an in Wave (or, of course, just wait for it to Bills will be reflected on your reports invoice? It’s probably time to create a Bill! import, assuming you have your bank connected to import transactions). in your Accounts Payable. The benefit of properly recording Bills is that you will have a better idea of how much • If you are consuming a service now, but Adding a bill will increase the money your business really has at any time: won’t pay until later, it’s good practice to balance of your Accounts Payable, you’re accounting for a payment out of your create a bill - even if your supplier and paying it off will clear it. business that you know has to happen, so doesn’t actually give you a physical ‘bill’ you’re prepared when it comes time to pay. until later.
Keeping this in mind will help when trying to By recording the bill, you recognize the figure out when to add a Bill, and when to expense as it is incurred, which gives you a simply record an Expense transaction. truer understanding of your business’ financial position, and how expenses match It’s not as simple as just recording anything against the income that they contribute to with the word “bill” in its name - for earning. example, if your business owns a vehicle and you take it in for service, the garage will likely write you a service bill… but you’ll need to pay it before picking the vehicle up! You Tip: All of your overdue Bills will appear on your Dashboard when you log in to Wave. wouldn’t need to bookkeep this in Wave as a bill.
37 Recording Purchasing assets Vendor prepayments Things you buy that help your business Sometimes, vendors may require you to pay transactions operate ‘right now’ are Expenses. Things for products or services in advance. In this you’ll use in your business for many months, case, the pre-payment is an Asset: you have that aren’t or even years, are ‘Assets’. not received the service, but you have acquired the right to receive it in the future. When you purchase an Asset – for example Jump ahead to Page 106 if you have a vendor income or a new truck for your business – you’ll pre-payment to categorize right now. usually want to add a new account in the expenses ‘Assets’ section of your Chart of Accounts Customer prepayments for the asset (Go to Accounting > Chart of Customer pre-payments are the opposite of Accounts to create it.), and categorize the vendor pre-payments. A customer pays you Most of the transactions you purchase transaction to the asset account. for a product or service you haven’t delivered categorize will be Income or yet – and may not deliver for some time. Expenses. And you know that your This isn’t ‘Income’, yet: you’ve got the money income, less your expenses, is equal in the bank, but your business hasn’t earned it. to your profit. It actually creates a Liability – an obligation to Every once in a while, though, you’ll your customer that you’ll satisfy in the future. See Page 104 to learn more. find that you have money flowing Purchasing inventory ‘Income’ that reverses an expense into or out of your account that Depending upon the business you’re in, you doesn’t really feel right categorized may purchase items for resale, or to use in If you purchased an item and categorized it as as a normal income or expense delivering services over time. It may make an Expense, but later returned it for a refund, sense to treat these as purchases of it’s not income! Simply categorize the deposit transaction. These require a little Inventory rather then directly as Expenses. as a Refund for Expense and select the same extra thought when categorizing. Jump ahead to Page 74 to learn more. expense category as the original purchase. We’ll go into detail on how to handle these later, but we’ll touch on them Tip: If you get stuck categorizing something that doesn’t feel right as Income or Expense, don’t get hung up on it. Write yourself a note and come back to it when you sit down to tackle your Monthly to here in case they come up for you. Quarterly bookkeeping.
38 Automations that save you time
39 Connect your bank to automatically import transactions
Once you have connected a bank account If you have changed your online banking Should you find that your bank is not to Wave, your transactions will continue to information, or the bank connection does supported, you can still quickly and easily pour into your account for as long as the not appear to be importing, try refreshing upload transactions by downloading them connection is active. As much as bank the account by clicking on Banking, from your bank in Microsoft Money, Quicken, connections are completely automated, selecting Bank Connections and entering Quickbooks or Simply Accounting format changes to your online banking your online banking credentials in the Edit and heading over to the Transactions page, information or your bank’s webpage can your Credentials page. clicking More, and clicking Upload a bank result in an interrupted connection. statement. Whenever you’re checking in on Wave to categorize transactions or create an invoice, it’s a good idea to make a note of Tip: Wave works with a third-party data integration partner to provide secure bank connections whether or not the connection is importing for transaction imports. Wave does not access your bank directly. Instead, when you connect your bank account to import transactions into Wave, our data integration partner makes the properly (bank reconciliation is another connection to your bank. surefire way to check in on your connection!).
40 Set up recurring invoices
If you bill for anything on a recurring To save time – and make your business’ Monthly payments on contracts, web- basis, you can save yourself a lot of income more stable and predictable – try to hosting fees, and most other services over a find ways to make the goods and services consistent basis with the same customer manual entry by scheduling a that you sell repeat at regular intervals. can be handled through recurring invoices, recurring invoice. To add a recurring saving you valuable time that can be spent If you sell a subscription-based service, invoice, click on Sales and select elsewhere. recurring invoices are by default your best Recurring Invoices. Create an option for billing customers, but there are a Look around, and you’ll find people selling invoice as you normally would, and number of other services that can be billed products as diverse as groceries, office set a schedule. on a recurring cycle. supplies, and razors on a recurring basis! That’s it! A recurring invoice will be automatically generated and sent with each scheduled date. Tip: If you want to send an invoice just once on a specific date in the future, Recurring Invoices can help with that too! Click on Sales > Recurring Invoices; create your invoice; then schedule it to repeat Daily; Create the first invoice on your chosen date; and choose end After 1 invoice. Wave will send your invoice on the date you have selected – and no more, as you have selected to send 1 invoice only.
41 Credit card, bank, & recurring payments
Any time you can accept payment for your Even better, when your customers pay Credit card payments work together with invoices online, you save yourself the online, some will choose to save their credit recurring invoices in Wave. Any recurring trouble of chasing payments in the real card details, and give you permission to invoices that you create can be paid world. charge their account directly for future through recurring billing, a feature that invoices! automatically bills a customer from their If you have credit card and bank payments saved credit card information each time an enabled in Wave, then every time a Wave provides your customers with the invoice is generated. Once this feature is customer receives an invoice, they will have option to do this every time they make a enabled (either by you or your customer), the option to pay directly from the invoice. card payment. neither of you will have to do anything to record a payment. With each invoice that goes out, your customer will receive a receipt, and you will collect payment immediately.
42 ACCOUNTING COFFEE BREAK #3 Journals & ledgers If you glance back at the one-page As early as the mid-15th Century, What you really financial statements from Accounting merchants had evolved methods of Coffee Break #1, you may notice that accounting built on this fundamental need to know every transaction we recorded directly double-entry concept, listing each affected two accounts. For example transaction in a day-book, or ‘journal’, when we paid rent, we used (reduced) and cross-posting the same about journals, money from our bank account (an transactions into two separate asset account) and recorded the Accounts within a Ledger. Given how ledgers, and payment to Rent (an expense well this method stood the test of time, account). when accounting began to move from paper to computers, software makers double-entry (and In every business, money - or value, adopted exactly the same principles more generally - doesn’t just appear or and methods. what you don’t!) disappear. It must come from somewhere (you, the owner; loans; or With easy-to-use and free modern revenue), and be used or invested financial accounting systems like Wave somewhere (in bank accounts and available, there’s no reason you’ll ever other assets; back to you, the owner; need to be able to perform double- to settle liabilities; or to pay expenses). entry bookkeeping by hand, on paper; This leads very naturally to the but it’s good to know the ingredients of practice of recording every transaction a traditional bookkeeping system, so as an exchange between two accounts you can understand what Wave is - just as we did in our simple examples. doing behind the scenes.
So, to that purpose, let’s take a look at the traditional accounting process…
44 Source records Journals Invoices, Purchase Orders, Books of daily record (just Bills, Receipts, Petty Cash like a personal journal that Slips, Bank Transaction Journalize transactions you write in every day), histories, and other possible where each transaction is data provide the original Each transaction of the business is listed in recorded in chronological source records of the chronological order in the Journals order, with a note of which financial activities of the account received value in business. the transaction, and which provided value.
Post transactions to the ledgers (double entry) Transactions in the Journals are ‘posted’ (copied out) into the relevant Ledger Accounts. Note that every Journal entry records an Account that receives value, and an Account that provides value, so every Journal entry contributes to two postings, to the two affected Ledger Accounts: a “double entry”.
Ledgers Financial statements Books of summary record, Prepare financial reports The Balance Sheet shows usually with a page for each totals at the Balance Date Account. Transactions first As at the reporting date, a Trial Balance is from the Asset, Liability, entered in the Journals are conducted to ensure there have been no and Owner’s Equity-type re-listed in the Ledgers, errors in postings to the Ledger. Ledger Ledger Accounts. where they are organized balances are extracted and re-presented in the Financial Statements. The P&L comprises totals and summarized by for the reporting period Account, rather than by from the Income and Date. Expense-type accounts.
45 In traditional paper-based accounting, While Wave can handle (almost) all your the first step was always to take the accounting by simply working from the Source Documents, and list ‘Source Documents’ such as Invoices, transactions into the day-book, or Bills, Receipts and categorized bank Journal. Transactions, there are other exchanges of value for which there With Wave, however, you mostly either may be no source document – or not create the Source Documents directly one that you can create in Wave. An in Wave, or easily capture their details example of this would be applying a from elsewhere. depreciation or amortization expense, For example, when you send an invoice which we shall meet on page 65. in Wave, the system automatically: For these transactions that Wave • Creates a transaction in the Sales cannot create automatically, you will Journal, recording the transfer of directly create a Journal Transaction, value between Sales and Accounts much as accountants have done for Receivable. centuries. Of course, unlike in the • Posts two copies of the transaction: paper-based past, your Journal Wave looks one to the correct Income Account Transaction will automatically be and one to the Accounts Receivable posted to the correct Ledgers, and account in your General Ledger. immediately be reflected in updated after (almost) all Financial Statements. In the same way, whenever you of this for you! categorize a transaction in your bank Account, Wave is actually journalizing a transfer of value between bank, and the Account into which you chose to categorize it.
46 So, what’s relevant to you?
Know how to record a Know a little about the Know that you’ll never in Know that there were Journal Transaction in General Ledger your life have to Post a other Journals and Wave Journal Transaction to a Ledgers, but that you Ledger don’t care!
Most individual transactions in Although it’s no longer pages in Unlike the old days of paper- Way back in the day, big Wave are recorded a big, leather-bound book, based, manual accounting – businesses with tons of sales automatically. For example, there’s still the General Ledger when transactions were and purchases would use when you send an invoice, – which is simply a listing of all literally written in to Journals, journals like the Sales Journal record a bill, or categorize an the transactions you’ve ever then copied into Ledgers, then to record Sales, and then post expense transaction from your made, organized by Account – checked and aggregated into them to special Ledgers, like bank account, Wave uses these right at the heart of Wave. financial statements that you the Sales Ledger. Periodically, source records and does all the could use – everything now sits the transactions in these The list of all the accounts in bookkeeping for you. in a big database, ready for you ledgers would be totaled and your General Ledger is referred to look at it from whichever posted to the General Ledger But sometimes you’ll want to to as your Chart of Accounts, angle you need. as a single amount for the directly record a transaction and you’ll want to know how to period. between two Accounts, and add new Accounts to your Unless you’re a member of a you’ll do that using a Journal Chart of Accounts, so you can Period Accounting Re- You don’t need to bother with Transaction (we’ll encounter use them in your bookkeeping. enactment Society, you’ll never any of this, but if your journal transactions for the need to manually post a accountant is talking to you first time on page 65). Journal Transaction to a about your Sales Ledger or Ledger in your life! Purchases Ledger, now you’ll know what they’re talking about!
47 PUTTING IT INTO ACTION Weekly to monthly tasks By the end of this section you’ll know how to…
Pay and record payment of bills Record payments for any bills that were recorded earlier in the period.
Run payroll Review payroll and pay your employees.
Review aged receivables Manage your overdue invoices to turn Accounts Receivable into cash
Reconcile bank account(s) Reconcile your Wave transactions against those in your bank statement.
49 Record bill payments
There are two ways to record a bill As you sit down each week or month Why not use ‘Money in Transit’? payment in Wave: to tackle paying bills, make sure that If you checked out the Help Center article the same bills that you created 1. Locate the imported payment linked on page 35 (how to use a Money in earlier in the month are marked as transaction that your bank connection Transit account to track checks), you may or transaction upload creates, and be wondering why not do the same when ‘paid’ in Wave. you pay a bill? The answer is simply to be categorize it: Payment Sent for a Bill in conservative: Your Dashboard page will remind Wave. This will bring up a list of any When you receive a payment that will take outstanding bills in Wave, from which you of any overdue bills that still time to reach your bank account, record it you can select the appropriate one. have to be paid. via Money in Transit so you don’t 2. Record payment for the bill directly. Go temporarily over-state your bank balance. Recording bill payments as soon as to Purchases > Bills; identify the Bill When you send payment, it’s best to they occur will keep your Accounts you want to pay; and use the drop-down assume it’s gone from your bank right away, so you don’t forget about it if your to the right of the Bill to select ‘Add a Payable correct and up-to-date, and vendor sits on your check for a few days or ensure you know what’s available in payment’. (Tip: Remember to delete any weeks. duplicate transaction that your bank your bank. connection or imports may add later.)
50 Run payroll
Depending on the frequency with If you are using Wave’s Payroll Direct Payroll to-do list: Deposit service to pay your employees, set which you run payroll, find time a few 1. Complete timesheets for any hourly aside time to review and approve payroll employees. days before your scheduled pay day several days before your actual scheduled to make any changes to your pay day. This will give you sufficient time to 2. Add to or deduct from pay if you need to add any bonuses, commissions, employees’ hours, add to or deduct make any changes and approve the payroll benefits, or deductions. from pay, and review the payroll while leaving time for the Direct Deposit process to withdraw from your account and 3. Review each line of the period’s Payroll details before clicking Approve this deposit into your employees’ on the Details and Pay Stubs. payroll. scheduled pay day. 4. Click Approve this Payroll. Once a payroll is approved, a journal When you approve a payroll with Direct 5. Provide employees with pay stubs if Deposit in Wave, the system will they have not been invited to Wave. transaction will automatically be automatically withhold local, state, and 6. When the payroll withdrawal transaction created to bookkeep the expense of federal taxes from your employees’ pay, is imported, categorize it to Payroll the wages paid, as well as any record employer remittance amounts, and Liabilities to show that the funds employee reimbursements and calculate any remittance amounts owed to successfully went to your employees. the government. payroll liabilities. Wave will also automatically bookkeep the Tip: Go paperless by inviting your Employees expenses and liabilities from the payrolls to access their pay stubs and year-end that you run, so that they can contribute paperwork directly in Wave. Just add their email address to their employee profile and towards meaningful reports. click Invite to Wave.
51 Review aged receivables, and chase payments early
Set up your invoices so there’s less Nobody wants to feel like they’re hassling clients. Wave provides chance of them becoming overdue, two convenient tools to help you face this challenge less often: and make reviewing your Aged Receivables Report a part of your weekly routine. Invoice reminders Saved cards and recurring payments When you send an invoice in Wave, click the When your customer pays an invoice online Reaching out to important clients for Payment Due field to set the due date. via Payments by Wave, they’re invited to money can feel awkward, but your save their payment card and authorize you After clicking Save and Continue, you’ll see to charge it for future invoices. business’s success and survival relies a menu with options to send reminders on cash coming in. Chasing before, on, and after the invoice due date. If a customer is overdue, check if they’ve payments the moment they become Set reminders now, so you don’t forget later. saved a card – and don’t be afraid to use it. It’s there because they gave you permission! due trains your customers to pay on You can also send a reminder at any time time, and keeps your cash flowing! after an invoice has been sent by navigating If your business provides a repeating to your Invoices page, and clicking the service, you can set up automated recurring Regularly reviewing your Aged Send Reminder link next to any overdue invoices and ask customers to save their Receivables Report is key to invoices. cards to enable automated recurring billing. ensuring that you’re on top of your Go to Sales > Recurring Invoices to get due and overdue payments. started.
52 If you do let a couple of invoices get away from you and they become overdue. As soon as you sign in to Wave, a list of all of your overdue invoices will appear in the Dashboard page. The option to send a reminder will appear right next to any overdue amounts.
You can also get a better idea of how much money is expected to come in by generating an Aged Receivables report in the Reports page. Your Aged Receivables report will give you a breakdown of the How to chase payments like a pro • Whatever date your customer promises to payments that are expected to make payment, confirm your discussion by come in per customer, as well as Many business owners struggle with chasing email, and re-send your invoice from Wave. the overdue amounts for each payments. Here are some tips to help you customer, organized by the chase payments like a pro: • If a customer tells you a check’s in the mail, ask for the check number as well as number of days by which they are • Use Wave automated reminders for a first overdue. when it was sent so you can look out for it. reminder, but as soon as a payment is overdue, use the phone. • Enable Payments by Wave, and ask your customer to pay online – right now. Try • Call earlier in the week; it’s easy for Tip: Before getting a hold of any saying: customers with outstanding customers to ‘forget’ a promised check as payments, be sure to check the they head off for the weekend! “You can pay this invoice online with a customer’s profile to see if you credit card. In fact, why don’t I stay on the have their saved credit card • You are calling for a specific commitment line now to make sure it goes through and information. If so, go ahead and to pay on a particular date – ideally today! apply a payment! you don’t have any problems?”
53 Reconcile your bank account(s)
On a monthly basis, reconcile your Reconciliation comes down to checking the If not, well, we’ve got some reconciling to bank account against the numbers in your accounting against your do. Click Reconcile to reveal a list of the bank statement to make sure they match. If month’s transactions. You’re going to want transactions that have been a transaction was recorded incorrectly, if to take a closer look at your bank statement recorded in Wave. Reconciling your you have a duplicate payment for an for the month, checking each transaction bank accounts regularly is the single invoice, or if any other number of that appears there against the transactions best way to ensure that what’s inconsistencies has occurred in your books, that appear in Wave, and making edits as happening in Wave matches what’s bank reconciliation is how you’ll find out. needed. By the end of the reconciliation process, the closing balances of your bank happening in the real world. To reconcile a bank account in Wave, click statement should match with Wave’s Accounting, select the Reconciliation exactly. feature, and select an account at the top of It’s also a key control that will quickly the page. This will reveal a list of every alert you if there are any unapproved month for which you have transactions with Tip: When you upload a receipt or apply a charges being taken from your a status of either Reconciled or payment to an invoice or bill, Wave will create an accounts! Unreconciled. Log in to your online banking associated transaction on the Transactions page. page in a separate tab, and generate a statement for the month that you want to If you’re importing transactions, you’ll likely reconcile. Click Start and enter in the wind up with duplicate transactions. Go ahead and delete the bank-imported transaction, as closing balance for the month. If the closing the one created by Wave will contain more balance matches Wave’s then you’re all detail! good!
54 ACCOUNTING COFFEE BREAK #4 Your business over time Profit & loss: Understanding your business over time
As we explored the Accounting If we turn our focus to the Income Whereas the Balance Sheet reports what Equation, we saw that the Balance Statement (aka the Profit & Loss Report), we the business has, what it owes, and what’s aren’t interested in just the total of our left over for owners at a specific date, the Sheet always balances, because it income and expenses from when the our P&L reports the income earned during a captures all the assets, all the business started. We want to see profit for a chosen period, and the expenses incurred specific period: last month; last year; the liabilities, all the funding from during that same period. first quarter. owners and all the income and expenses from when the business Perhaps we also want to compare our profit this month to our profit last month. started until right now. Let’s see how these two views connect.
56 ← Profit & Loss → Business ...and keeps Income - Expenses starts… going in this period
Balance Balance Sheet 0 Sheet 1 Balance Sheet 0 includes Balance Sheet 1 includes lifetime income less expenses lifetime income less expenses to here to here
As you can see, the P&L for any period reflects all the Obviously, it is good to know that we are making income less all the expenses for that period, and profits, but often what you really want to know is how ‘bridges the gap’ between a Balance Sheet at the your profits are changing over time. This is why - start of the period, and a Balance Sheet as at the end. although your tax authority only requires you to calculate and tell them your profit once each fiscal This is of course what we should expect: the profit in year - most business owners like to look at their P&L the business belongs to the owners, so it adds to report on a regular monthly basis (or even more often) Retained Earnings within the Owners Equity section, to see if things are getting better or worse. i.e. the part of the Balance Sheet that belongs to the owners. This means running regular P&L reports, and comparing them over time. Assuming the owners didn’t make any withdrawals, then this increase in Retained Earnings will have funded either an increase in Assets or reduction in Liabilities, or both.
57 ← P&L → ← P&L → ← P&L → ← P&L → ← P&L → ← P&L →
Balance Balance Balance Balance Balance Balance Balance Sheet Sheet Sheet Sheet Sheet Sheet Sheet Profit
Tip: Tracking profit month-to-month is a great thing to do (and who doesn’t like a profit line that goes up and to the right?), but you can get much more out of regularly comparing your P&L reports than this. In the section on Interpreting your Financial Statements (which starts on page 87), we’ll go through some really helpful techniques that you can use with your P&L reports from Wave.
58 If you only look at your Income which month any transaction relates to Accounting basis: Statement once a year, it is pretty may require a bit more care. clear which financial transactions There are two main, accepted methods Accrual for relate to that year. But as you narrow of assigning transactions to periods: the time period of your accounting the Accrual method, and the Cash down to monthly - and as you hope to understanding; method. gain useful under-standing of how cash for taxes your business is changing month-to- Let’s look at the differences, using a month, determining simple example:
Jenny is a successful marketing consultant. In March, she completed a major project for a long-standing client. The project started and completed during March, and all the work was done in that period. On March 31st, she invoiced her client her $35,000 fee. The opening stages of the project had required some graphic design work that Jenny didn’t have time to do herself, so she had contracted Max to handle that part of the project. Max completed the work really quickly, and invoiced Jenny his $8,000 fee on March 10th. Jenny paid it one week later - on March 17th. Jenny’s client was delighted with the project, and paid her promptly within 1 week, on April 5th.
Let’s look at this on a timeline, and explore the accounting…
59 March 31st: Jenny invoices Client $35,000
th Jenny works on project April 5 : Client pays Jenny’s throughout March fee: $35,000
February March April
Max completes Subcontracted design work March 17th: Jenny pays Max $8,000
March 10th: Max Invoices Jenny for his work
On a Cash basis, Jenny would recognize the revenue from the project in April, when her client paid. She would recognize the cost of Max’s sub-contracted design in March, however, because that’s when she paid him. If this were her only project, the top of her P&L would look like this:
ACCOUNTS MARCH APRIL
Income
Project Sales $35,000
Cost of Goods Sold
Subcontracted Design $8,000
Gross Profit (Loss) ($8,000) $35,000
Gross Profit Margin N/A N/A
60 Clearly, something’s not quite right. Jenny’s business hasn’t swung from tragic loss to glorious profit in the space of a month: there’s just a confusion created by splitting the income and expense into separate months. By comparison, on an Accrual basis, Jenny would recognize the revenue from the project in March, when it was done and invoiced; and the expense to Max in March as well, when she incurred that expense. If this were her only project, the top of her P&L would look like this:
* Gross Profit ACCOUNTS MARCH APRIL Margin measures the Income proportion of Project Sales $35,000 Sales that remain after Cost of Goods Sold paying for Cost of Goods Sold to Subcontracted Design $8,000 cover general business Gross Profit (Loss) $27,000 expenses and provide profit to Gross Profit Margin* 77% owners.
As this demonstrates, the Accrual basis better This leads many small businesses owners to shows what really happened in Jenny’s believe they should run their accounting on a business: she completed a $35,000 project in Cash basis, but this is not the case. Accounting March with $8,000 of costs, resulting in a on an Accrual basis gives a much clearer and $27,000 profit. Her Gross Profit Margin was 77%. more actionable understanding of your business Pretty good! throughout the whole year, and adjusting your Year-end numbers to Cash basis to file taxes is In general, accounting on an Accrual Basis quick and easy. The reverse is not the case. provides a much better platform to understand, and better manage your business. The vast The primary purpose of accounting is to majority of business owners in North America, understand your business and be more however, are required to report and pay taxes on successful every day, not to file taxes once the Cash Basis, which has the advantage that a year! the government isn’t asking you to pay tax on work you have not yet been paid for.
61 PUTTING IT INTO ACTION Monthly to quarterly tasks By the end of this section you’ll know how to…
Report & remit sales tax Identify any taxes owed and correctly account for their payment.
Record depreciation/amortization Accurately recognize how your assets contribute to your business over time.
Expense business use of home Record and account for office space and services that you provide within your home.
Re-phase income Match income made over time with the work and materials that went into it.
Write off bad debt Record bad debt when customers don’t pay.
Track inventory Record the value of your inventory as it’s purchased and sold.
63 Report & remit sales tax
If your business collects sales tax, one Depending on where you’re doing business, Once the payment has been made outside regular task you’ll need to perform is the size of your business, and other of Wave, it can be accounted for through a considerations, you may report and remit simple transaction in the Transactions calculating the net amount of sales sales taxes on an accrual or a cash-basis. page. tax you have collected on behalf of The Sales Tax Report can be adjusted to Categorize the tax payment transaction the government, and paying it. display your taxes owed on an accrual or under the name of the sales tax. The system will take into account if the transaction is a Wave’s Sales Tax Report will give cash basis by setting the Report Type at the top of the page, so either way, Wave’s withdrawal or deposit in order to determine you a breakdown of the tax you have got you covered! whether sales tax account’s balance should collected, the tax you have paid on be credited or debited. purchases, and the balance that you owe (or are owed). Important: Sales Tax rules and reporting processes vary widely from country to country, and even within countries. Check with your tax authority, or consult an accountant where you do business, to make sure you understand your local requirements correctly.
64 Apply depreciation or amortization
To get the best picture of the true In the last Accounting Coffee Break, we saw rental expense every month. If, instead, you profitability of your business, you’ll how taking care that expenses and the are able to buy a vehicle for cash and “rent it related income that they contribute to from yourself”, the profitability of your want to spread out the cost of high- earning were grouped together in the business isn’t fundamentally different: value fixed assets such as vehicles or correct time period ensured Jenny’s Income you’re still using a delivery vehicle every equipment over their useful life, so Statement (P&L) made sense and properly month, and should still charge the expense. showed how her business was performing. that you recognize a part of their Here’s an example: Let’s say you bought a cost against each month’s income When a business acquires high-value assets truck for $34,000. You plan to keep it for 2 that will contribute to help the business years, and estimate you’ll be able to sell it and see what it really costs to earn revenues over a long period, it wouldn’t for $10,000 at the end of that time. That operate your business. make sense to take all the cost as an means that over 24 months, the business expense when the asset is acquired. will ‘use up’ $24,000 of value in the truck. If The technical term for this is Instead, the purchase is originally you’re ‘using up’ $24,000 in value over 24 applying depreciation, or accounted as buying an asset, and a portion months, it seems to make sense that you’d amortization. (Strictly, depreciation of its value is charged as being ‘used up’ recognize $1,000 in expense each month. each month. applies to tangible assets, and Let’s take a look at how this can be amortization to intangible, but you’ll Think of it like this: if your business rented a accomplished in Wave… delivery vehicle, you’d obviously record the see the terms used interchangeably.)
65 How to record depreciation or 3. Each month, create a Journal Important: Depreciation is a amortization in Wave: Transaction to Debit an account called management accounting concept, 1. If you haven’t done so already, record Depreciation Expense and Credit the designed to fairly spread the cost of an the purchase of the asset. (Follow the appropriate Depreciation and asset across its useful life. Your instructions on page 38 for how to Amortization account. depreciation calculations are ‘correct’ categorize an asset purchase.) Here it is for our Truck example: when they faithfully reflect what really 2. Next, we’ll want to add a Depreciation happens in your business. Contra Asset account. This depreciation is not what you use to claim deductions for your tax. Go to Accounting > Chart of Accounts. On the Assets tab, scroll Governments also understand that down to Depreciation and assets should be expensed over their Amortization, and click the Add a New useful life, but rather than leaving it to Depreciation and Amortization you to calculate what’s realistic, they Account link. create long and complex lists of rules. In the US, tax depreciation rules are Sticking with our $34,000 truck defined under the Modified example, we might call this new Accelerated Cost Recovery System account Depreciation - Truck. (MACRS). In Canada, businesses claim Capital Cost Allowances. Tip: In general, if you only have a few assets to depreciate, it can be easiest Deciphering all the rules and to have an account for each; if you calculating your deductions under have a great many, you’ll probably be MACRS / CCA is one area where it is better off tracking their depreciation on Note: to create a Journal Transaction, go wise to consult a CPA in the tax a spreadsheet, and just recording a to Accounting > Transactions, and jurisdiction where your business total for depreciation across all assets click the ‘More’ button at the top-right operates. in one account. of the page.
66 Expense business use of home
If you’ve run your own business for Imagine your business operates from a There are two methods to recognize use of some time, you may be accustomed rented office, costing $1,000 per month. your home for business in your That feels like a pretty obvious business bookkeeping: to claiming a deduction for Business expense. - If you actually reimburse yourself each Use of Home in your tax returns. But Imagine now that you had signed the lease month from your business account, simply have you considered that this is personally, and that you pay the rent out of categorize the expense as Office Expense; about more than just tax? your own pocket. Is it still an expense of the or business? Surely, yes. You would record this - If you don’t reimburse yourself, post a In Management Accounting, the goal as an expense of the business, and either be monthly Journal Transaction to debit Office reimbursed, or add the cost to your Owner’s is to document and understand the Expense; credit Owner’s Investment / Investment balance to take out later, when true performance of your business. If Drawings. your business can afford it. your business relies on office space How much should you charge? When your business occupies space in your or other services that you provide home, the situation is really not much In your management accounts, you can within your home, then that resource different: you are paying personally for a charge whatever feels right. Using the same calculation that you apply for tax, however, resource that your business consumes to is part of how your business operates, will save time later. operate; you should record the expense, and whether you document the cost or Talk to your accountant, or research your be reimbursed, or credited for your Owner’s local rules, to figure out what is allowed for not. We suggest you document it. Investment. tax where you are.
67 Expense business mileage
When you use your personal vehicle For management accounting purposes, There are two ways to bookkeep shared for business travel (just like when you there are three commonly used approaches vehicle expenses: to calculating and sharing vehicle expenses: use your home for business purposes, - If you/your business are directly 1. For a vehicle that your business owns or reimbursing the other, categorize the as we’ve just explored), it’s a good leases: directly record as expense all lease transaction in your bank account as Vehicle idea to recognize this expense in or depreciation costs, together with Expense (which should be categorized as a your bookkeeping – whether or not insurance; fuel; servicing; etc. Reimburse refund if you are reimbursing your you actually get reimbursed by your your business for personal use of the business.) vehicle, based upon your share of mileage; business at the time. - If there is no reimbursement, post a 2. For a vehicle that you own or lease: monthly Journal Transaction between Of course, it could also be that your record all your expenses of operating the Vehicle Expense; and Owner’s Investment / business directly owns or leases a vehicle, and assign a proportionate cost to Drawings. your business based on mileage share; or vehicle, and you make some use of it How much should you charge? in your personal life. In this case, you 3. Alternatively, for a vehicle that you own For a vehicle you own, the simplest way is to or lease: charge your business a flat rate per should again be bookkeeping in such charge a cost-per-mile that matches the tax mile, consistent with tax allowances where deduction for business use of your vehicle. a way that you and your business you are. For a vehicle your business owns, go with the actual expenses and pro-rate according to properly share the cost. Pick one – don’t mix methods! mileage. Just know that come tax time, different rules may apply.
68 Re-phase “lumpy” December December income Work spans a full year
December 2018: Customer is invoiced $120,000 December 2019: Work is completed
When you create an invoice for work Heads up: the word “lumpy” isn’t This can also work the other way around. that will take place (or has taken accountant-speak for anything! We’re using Suppose you have a good customer whose it here to describe income that is invoiced all credit-worthiness you trust, and you deliver place) over an extended period, it’s at once but earned across several periods. a project for them over two months, invoicing at the end. good practice to spread the income Let’s say you invoice a customer $120,000 out over the months in which the for a project in December, that will take a full Suppose also this project is a large chunk of work is done. year to complete. In this scenario, your your total work in those two months. profit and loss statement for December is In this case, taking all the income into This will allow you to match the going to look pretty darn impressive, but Month 2, when you write the invoice, would really, the work will be ongoing until the income with the work and materials distort your accounting: much lower income following December. that go into it. in Month 1 than you really earned; much Common sense tells us that, if we want our higher in Month 2. accounting to show us what’s really So, just as we might re-phase income happening with our businesses, we need to forward when it is billed all at the beginning take this ‘December-this-year’ income and of a long project, we might re-phase back spread it out over the period we’ll actually when it is billed at the end. be delivering the project.
69 Re-phase income forward in Wave 2. Right now, your December income 3. We’ve successfully removed the includes $120,000 for this project. You Let’s get the scenario clear: you have $110,000 income that didn’t ‘belong’ in know that only $10,000 really relates to invoiced your customer $120,000 in December. Now we need to put it back in work that you will complete in December December. Wave has recorded $120,000 of the next January through November. – the rest is going to spread out over the Sales, and balanced this with $120,000 of Add another journal transaction, this time next 11 months. More formally, $110,000 Accounts Receivable – an Asset in your for January: is unearned as at the end of December, balance sheet. so that’s what we’ll record. Debit Unearned Income $10,000 (Perhaps your customer has actually paid Credit Sales the same amount. for a year’s work in advance, which would Go to Accounting > Transactions and Repeat this step for each month of the be awesome. From an accounting click the More button on the top-right year. perspective, however, that just means to add a journal transaction (dated in December): you’d have the $120,000 in the bank asset You’re done! You’ve spread the on your Balance Sheet, instead of Debit Sales $110,000 December income to reflect when it is Accounts Receivable.) Credit Unearned Income the same actually earned. On your Income Now, you haven’t actually earned the amount. Statements, you’ll see a true picture of Income yet, so how can you reasonably how your business is performing! have this Asset? The answer is that it is offset by an obligation – to deliver $120,000 worth of service or products. And we record obligations as Liabilities. Let’s go ahead and do this…
1. We’ll need a liability account to track the obligation arising from the unearned income. Go to Accounting > Chart of Accounts and switch to the Liabilities & Credit Cards tab. Scroll down to Customer Prepayments and Customer Credits and click the ‘add’ link. Name the account “Unearned Income”.
70 Re-phase income backwards in Wave 2. The easiest way to think about this is 3. We’ve successfully recorded that probably to imagine our way back into $10,000 was earned in March, but Wave Let’s work this through, using the example March (the prior month – before the recorded $20,000 Sales when you of a $20,000 project, with the work done project was completed and invoiced). invoiced your client. We’re double- equally in March and April, and invoiced on th counting $10,000! April 30 . As at the end of March, you had When you create the invoice, Wave records delivered $10,000 of services and/or Let’s fix this. Add another Journal $20,000 to April Sales, balanced by products; you had earned this income. transaction, dated April: But because you hadn’t yet asked the $20,000 of Accounts Receivable. But we Debit Sales $10,000 know that $10,000 of the income ‘belongs customer for the money, it wasn’t an Credit Un-invoiced Income the same Account Receivable, it was simply Un- to’ March. amount. invoiced Income. Re-phasing income ‘backwards’ is – no You’re done! You have carried $10,000 surprise – the opposite process of re- Let’s record that now; go to Accounting income from April back into March when phasing ‘forwards’. But what accounts > Transactions and click the ‘More’ it was actually earned. Your March and should we use? button to add a Journal transaction April Income Statements should now be dated March: much more realistic. When we recorded income that wasn’t yet earned, we used a liability account that we Debit Un-invoiced Income $10,000 called ‘Unearned Income’. In this case, we Credit Sales the same amount. are dealing with income that has been earned in an earlier period, but invoiced in this period. So if it is income that was earned but not invoiced, why not call it ‘Un-invoiced Income’? And because this is something that will ultimately turn into cash in the bank, it must be an Asset. 1. Go to Accounting > Chart of Accounts. Scroll down to Expected Payments from Customers and click the ‘add’ link. Name the account “Un- invoiced Income”.
71 Write off bad debt
Even if you’ve been keeping on top of You might guess that writing off a bad debt OK – perhaps you’re thinking: is as simple as posting a Journal your sent invoices, inevitably there “So… the way to handle an invoice that I Transaction to reduce Accounts know is never going to be paid, is to mark it will come a time when it’s necessary Receivable and record a Bad Debt ‘paid’?!” to write off bad debt. expense. Yes it is. Go through your overdue invoices on In a sense, that’s perfectly correct, but we also want to make sure that the written-off But bear with us, and in a moment this will a monthly or quarterly basis and be invoice doesn’t keep showing up in unpaid all make a lot more sense… honest with yourself about which invoices. payments you can reasonably expect In Wave, the only way to remove an invoice to receive. from the unpaid invoices listing is to record a payment, so that’s what we’re going to If you realize a customer is never need to do. going to pay, bite the bullet and write off the invoice.
72 Write off bad debt in Wave: 3. When you know that you will not receive 4. Now, head over to the Transactions payment for a particular invoice, page and add a new expense 1. Because we’re going to ‘pretend’ that navigate to your Invoices page and transaction equal to value of the invoice the invoice we’re writing off is paid, apply a full payment to the unpaid that you are writing off. Set the account you’ll need a ‘pretend’ bank account to invoice. Use Undeposited Funds as the to Undeposited Funds and the deposit the payment. payment account. Now the invoice is category to Bad Debt Expense. You’ve Accountants often use an ‘Undeposited removed from your Overdue Invoices now balanced out your Undeposited Funds’ account as an intermediate step list, and its value is deducted from Funds account from the earlier invoice in recording transactions. We’ll do the Accounts Receivable. payment, and successfully recorded the same. bad debt expense! Navigate to Accounting > Chart of Accounts. Click the Add a New Cash and Bank Account link, and call your new Account ‘Undeposited Funds’ (or any other name that you’ll recognize as just a ‘pretend’ bank account for special transactions).
2. Let’s also create an expense account for your bad debt. Go back to the Chart of Accounts page and switch to the Expenses tab. Scroll to the bottom of the Operating Expense section, and click the ‘Add’ link to create a new expense account named Bad Debt.
Tip: You can also apply this method to write off small differences – for example if a good customer paid the dollar amount of a large invoice, but missed the cents off their check. You’re probably not going to chase the customer for the odd few cents, but you also don’t want the invoice appearing forever on your Dashboard and in your Aged Receivables Report.
73 Track inventory
If you’re running a service-based It is common practice, when creating an Sometimes, you’ll incur direct Cost of Goods Sold expenses just as you need them. If you business, then you may not need to Income Statement, to report direct Cost of Goods Sold (CoGS) right underneath your are drop-shipping, for example, every time worry about tracking your inventory. Sales. Wave does this automatically. you sell one item, you buy one item. The expenses and income match in the same For product-based businesses, CoGS is a special category of Expenses. It period, and everything is clear and simple. however, it’s important to consider includes only direct costs, which go up and whether purchases of raw materials down with the level of your sales – things Other times, you may make a purchase that will enable many sales over months to come, and goods for resale are direct costs like the buy-in cost of an item you resell, or charges from sub-contractors that work on and it no longer makes sense to record the of sales in the same period, or ‘piece-rate’. whole purchase as a CoGS expense right at whether they represent building up the time. In these cases you’ll need to Sales less CoGS equals your Gross Profit, record the purchase as creating Inventory Inventory – an Asset on your Balance which is available to pay general business (an Asset on your Balance Sheet) and then Sheet. overheads, and you! cycle the Inventory asset into CoGS expense as it is used up. Let’s see how to deal with this in Wave.
74 Track inventory in Wave 3. Each time you purchase any inventory, 4. Every time you make a sale, create a Method 1 – “Perpetual”: such as finished goods for re-sale, or Journal Transaction that debits your materials that you will use to deliver There are two common methods to Cost of Goods Sold account, and your service, categorize the transaction account for Inventory: ‘Perpetual’ and credits your Inventory account by the that appears in your Transactions page ‘Periodic’. The Perpetual method is most value* of the inventory you have sold or under the Inventory category that you suitable if your business makes relatively used up in delivering your service. Your just created. You are categorizing the Balance Sheet will reflect the decrease few, larger sales, where the inputs used up purchase as an Asset; not an expense! to deliver a sale are clearly identifiable. in your Inventory asset, and the Gross The Periodic basis is more suitable when Profit on your Profit & Loss Statement your business makes many individual will reflect the cost applied to the sale. sales, and it is not practicable to track the inputs used for each individual sale.
Let’s look at the Perpetual method – but if ‘Periodic’ sounds more like your business, feel free to skip to the next page! 1. We’re going to need at least one Inventory account. Go to Accounting > Chart of Accounts; scroll down to the Inventory section, and click the ‘Add’ link to add an account. For this discussion, we’ll name it ‘Inventory’, but you may create specific accounts for different types of inventory. 2. Switch to the Expenses tab in your Chart of Accounts; scroll down to Cost of Goods Sold; and click the ‘Add’ link. We’ll just call this ‘Cost of Goods * Always record the value of Inventory at the purchase cost to your business; not the price you will sell it. If you purchase many different items, you will probably want to have multiple Sold’, but again you may want to use a Inventory accounts, and/or keep a record of your purchases, the cost per unit purchased, more meaningful name in your and the inventory used for each sale, in a spreadsheet. business.
75 Track inventory in Wave 3. Each time you purchase any inventory, 6. Now we can post a month-end Journal. Method 2 – “Periodic”: categorize the transaction that appears Let’s say we calculated that our CoGS in your Transactions page under the for Fidget Spinner Sales in January was Imagine you jumped on the Fidget Purchases category. Again, you are $1,602; here’s our Journal entry: Spinner bandwagon. You got a great deal categorizing the purchase as an Asset! on 5,000 fidget spinners for $10,000 ($2 each) – enough for 6 months’ sales. Under the Perpetual method, we’d be recording this purchase to Inventory, then posting a Journal Transaction to record CoGS on every sale – all 5,000 of them! That would be a ridiculous amount of bookkeeping, so instead let’s use the Periodic method. 1. Just like before, we’re going to need at least one Inventory account, and at least one Cost of Goods Sold account. Refer back to Steps 1 and 2 on the previous page for a reminder 4. At the end of each month, it’s time to how to create these. count what inventory you physically 2. To apply the Periodic method, we’re have left. You need to know what you This is the first Journal Transaction going to want one more account: have, and what it cost you to buy. we’ve seen with three entries. What’s another Asset account, which we’ll 5. Now it’s calculator time: call ‘Purchases’. This account is happening here? most like Inventory, so go to Closing inventory from last month i. We record $1,602 of CoGS Accounting > Chart of Accounts; ii. We reduce the value of Purchases to scroll down to the Inventory section; + Purchases made during this month zero – do this every month and click the ‘Add’ link to add this iii. The difference represents an new Purchases account. - Closing inventory from this month increase in Inventory since last = CoGS during this month month.
76 Seriously. Before you spend a lot of And if you answer “No”, then simply A third way to track time tracking and making adjustments categorize your purchases of items for for Inventory, consider how much this resale and other direct costs straight inventory in Wave… will impact your accounting. to Cost of Goods Sold. We haven’t talked about “materiality” Does this mean we’re saying don’t yet, but we have stressed the idea that bother with Inventory at all? Not quite Don’t bother! you keep accounts primarily to – but if the fluctuations month-to- understand your business. So if the month aren’t at all significant, then costs of things you sell or combine into you’ll probably be just as well off your services are small, or even if the adjusting your inventory once each costs are large, but you buy and sell a year – i.e. make sure your Inventory consistent amount each month so that account is correct for your year-end your inventory levels don’t change Balance Sheet (reduce CoGS for any much, then ask yourself: “Does increase in Inventory, and vice versa), tracking inventory every month really but otherwise save yourself the work. help me better understand my Remember – you’re accounting for business?” your benefit, and time spent on accounting precision that is not material to your business is time wasted!
77 ACCOUNTING COFFEE BREAK #5 Understanding debits and credits Understanding debits & credits
When you run your business with Wave, most basic bookkeeping is Debit/Credit theory is not a Your bank Isn’t trying to confuse theory! you! handled for you. For example, when you send an Invoice, Wave Right off the bat, let’s get one thing OK. We credit the account that gives automatically updates your out of the way: Debit/Credit theory is value, and debit the account that receives value. So when a customer Income and Accounts Receivable not a ‘theory’. It is simply a naming convention. pays us $1,000 and we deposit the accounts. money into the bank, we debit bank. As we discussed in Accounting Coffee In the previous section, we looked Break #2, every transaction with or But when we see our bank statement, at special cases where you need inside your business is an exchange it shows a Credit. What’s going on? between two accounts: one account to record an exchange between This is actually key to a really gives value; one receives value. two accounts yourself, using a important understanding: all your In recording the transaction, we credit bookkeeping is performed from the Journal Transaction to debit one the account that gives value, and perspective of your business. So, when account and credit another. debit the account that receives value! your business deposits money into the bank - i.e. ‘bank’ receives value - you This brings us to the nemesis of debit bank. so many fledgling bookkeepers: By convention, ‘Credit’ is abbreviated to ‘Cr’; ‘Debit’ is abbreviated to ‘Dr’. But how does this transaction look Debit/Credit theory! from the bank’s perspective? Don’t be afraid... Stick with us. We’ll get through this together! 79 If we flip things around and look at the your bank, it will not only cease to be same transaction from the bank’s confusing - it will actually help understand perspective, everything is reversed. When and remember the difference between debits your business deposits funds, the bank and credits. sees your business as giving value (literally, Let’s summarize it this way: you are lending the bank money!). When the bank receives value from your In any transaction, we credit the account business (a deposit into your account with that gives value, so the bank - in its the bank), they credit your business’ bookkeeping - credits your business. And account. In your bookkeeping, you debit the that’s what shows on your statement. bank’s account with your business. This is the source of much confusion for When the bank returns value to your business business owners as they try to get their (a withdrawal from your account with the heads around bookkeeping for the first bank, or issuing your business a loan), they time, but hopefully once you understand debit your business’ account. In your the difference in perspective between your bookkeeping, you credit the bank’s account business and with your business.
80 At this point in explaining Debits and Most of the time – i.e. “normally” – in a Why some Credits, most accounting texts will well-functioning business, we’d expect present you with a table listing a set of to make Sales, which ultimately flow accounts get account types that you debit to into Bank. Each time we make a sale, increase their value in a journal bank receives value (so we debit it); our transaction, and a set that you credit Sales account gives value (we credit it). bigger with debits, to increase their value. They may offer So, the normal direction of bank is a handy mnemonic that you are debit; the normal direction of Sales is supposed to remember so that you will and others With credit. (Think back to the difference be able to recall these rules and get between your business’ perspective of your journal transactions the right way your bank account, and the bank’s. The credits around. normal direction of your account from Let’s skip that, and continue the work the bank’s perspective, which shows of actually understanding the core up on your bank statement is hopefully concepts, so that you’ll never need to credit!) go look up a table, or remember what Let’s generalize this: each letter in your ‘easy-to-remember’ mnemonic stood for! Bank is an Asset account: Let’s talk, instead, about normal The normal direction of all Asset direction, which reveals the accounts is Debit. underlying common sense (Can we say ‘beauty’? No? OK, let’s stick to Sales is an Income account: ‘common sense!’) of the double entry method of capturing the exchange of The normal direction of all Income accounts is Credit. value between two accounts in every transaction.
81 Another source of funds into your OK. That’s Assets, Income and Owner’s Lastly, Liability. Let’s say our business business’ bank – or other Asset Equity. What types of account are we purchases a vehicle on finance. Our accounts – will very likely be your left with? Expense and Liability. Let’s Motor Vehicles (asset) account receives original investment of Owner’s Equity. think about Expense. value, so we debit Motor Vehicles (which is the normal balance direction We already know that the normal In the normal course of things, we buy for all asset accounts). The account direction of Asset accounts is debit, and goods and services to consume in our that gives value in this transaction is indeed bank receives value in this business, and pay for them ultimately the Detroit Motor Vehicle Finance Corp original investment. with money from our business’ bank (DMVFC), which is a Liability account in account. So, bank gives value (we credit The account that gives value – from our business’ accounts. So we credit bank); the relevant Expense account your business’ perspective: you are not DMVFC. receives value, and we debit it. your business! – is you, i.e. Owner’s Any time we create or increase a liability Equity. So we credit Owner’s Equity. The longer we are in business, the more in our accounts, we credit it. The normal direction of Owner’s Equity in total we will have spent on each type of expense, so the more we will debit it. is Credit The normal direction of a Liability is Credit. The normal direction of an Expense is Debit.
Whenever we record a transaction that increases the numeric value of any Account in our bookkeeping, we are increasing the value of that account further in its normal direction. Here’s why: § when we increase the value of an Asset or Expense account - that account receives value – so we Debit it.
§ when we increase the value of an Income, Liability or Owner’s Equity account - that account gives value – so we Credit it. This explains why some accounts get bigger with debits, and others with credits. This is not an accounting ‘rule’ that you need to learn; it simply emerges from following the logic of tracking how accounts give and receive value always from the perspective of your business.
Accountants also refer to Normal Balance. If you perform a series of transactions in an account’s normal direction, then it’s balance will – naturally enough – lie in that direction. So, we can also say that the Normal Balance of Asset and Expense Accounts is Debit; the Normal Balance of Income, Liability and Owner’s Equity accounts is Credit.
82 Why total debits must equal total credits
Hopefully we’ve already cemented in your mind the But we’re just geeky enough at Wave to think the way idea that none of this debit / credit business is accounting works is actually kind of cool, so if you have anything more than applying labels to the very obvious a spare few minutes, stay with us to explore - at a and logical process of recording which account gives deeper level - why this works, and why the accounting value in each transaction (credit it!), and which account ‘rule’ that total debits must equal total credits in every receives value (debit it!). transaction has to be true.
If you remember back to Coffee Break #2, we spent some time thinking about all the places money could come from in your business, and all the places it could go to. We started with this…
Owner’s Lifetime Lifetime Owner’s Assets = + + Liabilities - - Investment Income Expense Withdrawals What other What the All the money What owners people have All the All the income owners have and value of have put into the provided to the expenses the the business has taken out of ‘things’ in the business since it business, and business has ever earned the business business today started are owed right ever incurred since it started now
…and worked our way through to discovering for ourselves the simple principle that accountants call the Accounting Equation: Owner’s Assets = Liabilities + Equity
All the money and What other people Owner’s value of ‘things’ in have put into the Investment, the business business, and are together with today owed right now Retained Profits
83 Let’s go back to that simple first observation, and rearrange the formula in a slightly different way by adding Lifetime Expense to both sides, and grouping Owner’s Investment less Owner’s Withdrawals together as we did before:
Lifetime Owner’s Owner’s Lifetime Assets + = Liabilities - Expense + { Investment Withdrawal } + Income What other All the income All the money All the people have the business and value of What owners have put into the expenses the put into the has ever ‘things’ in the business since it started, less what business has business, and earned, less business they’ve taken out ever incurred are owed right all its today now expenses
As we did last time, let’s simplify Owner’s Investment less Owner’s Withdrawals simply to Owner’s Net Investment, so we have this - let’s call it the Accounting Flows Equation:
Lifetime Owner’s Net Lifetime Assets + = Liabilities + + Expense Investment Income What owners What other have put into All the income All the money All the people have put the business the business and value of expenses the into the since it started, has ever ‘things’ in the business has business, and less what earned, less all business today ever incurred are owed right they’ve taken its expenses now out
84 Cool. But what does it all mean?
Let’s look at that again:
Debited
Lifetime Owner’s Net Lifetime Assets + = Liabilities + + Expense Investment Income What owners What other have put into All the income All the money All the people have put the business the business and value of expenses the into the since it started, has ever ‘things’ in the business has business, and less what earned, less all business today ever incurred are owed right they’ve taken its expenses now out
Credited
As you can see, we have Asset and Expense terms on the Conversely, a transaction that reduces the value of an Asset left; Liability, Owner’s Equity and Income terms on the right. or Expense (credit), must be matched by an equal increase (debit) to another Asset or Expense account, or by reducing Now, this equation is like any equation: to keep it in balance, (debit) a Liability, Owner’s Equity or Income account. changes on the left of the equal sign must be matched with changes on the right. We know that every accounting transaction involves an exchange of value, expressed as a Debit and a Credit. Having So, if a transaction increases an Asset account by, say, $100 worked through the logic of where money can possibly flow (the Asset account receives value and is therefore debited) into, through or out of a business, it hopefully becomes clear this must be matched either by a reduction on the left - that to keep our formula in balance, total Debits must equal reducing (crediting) another Asset account, or reversing a total Credits in every transaction. This is not an arbitrary charge to an Expense account – or more commonly by a accounting ‘rule’; just the natural consequence of a realization matching $100 increase on the right, crediting the ‘giving’ that money, like energy, is neither created nor destroyed – account(s), which will be a Liability, Owner’s Equity, or Income only transformed. account.
85 When accounting journals were Well, accountants are a fairly logical The least updated by hand, accountants bunch, so adding in our developed a convention to always understanding of Normal Direction / write the two sides of the transaction Normal Balance, you might guess the important thing in a particular order. solution they arrived at: place the account that is Debited on the left, Looking at the equation on the and the account that is Credited on to know about previous page, perhaps you might the right. In other words, for a ‘normal’ guess they would always write the transaction, involving one account debits and credits side of the transaction that deals with from either side of the “Accounting Assets or Expenses on the left, and Flows Equation”, where each is the side that deals with Liabilities, Now that you know everything increased, the Debited account will be Owner’s Equity or Income on the from the left side of the equation, and you need to know about Debits right. the Credited account from the right. and Credits, let’s take a look at That would work for many, or even This gives rise to… something you don’t! most, transactions, but what about a transaction that transfers value The least important thing to know between two accounts on the same about debits and credits ‘side’ – for example receiving a … but something that many customer payment that reduces accounting texts stress as the key (credits) the Accounts Receivable take-away: in a Journal Transaction, asset account and increases (debits) Debit written is on the left; Credit on the bank asset account? the right. Which would go first? Of course, using an accounting software such as Wave, you can enter your debits and credits in whatever order you please: Wave will sort out displaying these in your reports in a way that makes your Accountant happy!
86 ANALYZING YOUR BUSINESS Interpret your financial statements 87 By the end of this section you’ll know how to…
Analyze your financial statements Read and interpret your Balance Sheet and Income Statement (Profit & Loss Report) to get meaningful insights for your business. Calculate the quick ratio Can your business pay off its current liabilities with its current liquid assets?
Calculate break even sales Determine the exact point at which your business will make neither a profit nor a loss.
Explore trends in your numbers Note trends month-over-month to give you the information you need to continue driving your business forward.
Make forecasts Use previous periods’ numbers to forecast your business’ cash flow and help anticipate its financial needs.
88 Analyzing your financial statements
Right from the beginning of this Over the next few pages, we’re going to dig Balance Sheet guide, we have stressed that the into the Financial Statements – your Go to Reports > Balance Sheet and set the Balance Sheet and Income Statement (P&L) date picker to the last day of the period you primary purpose of keeping accounts – and see how with a few simple are analyzing. Click Update Report, and is to understand your business and calculations, they can yield useful switch the ‘toggle’ from Summary to be more successful. information about how your business is Details. Print the report. performing. So now let’s dive in and look at some Profit & Loss (Income Statement) Just so that we don’t have to keep saying of the insights you can gain from “now open up your Balance Sheet” or “run Go to Reports > Profit & Loss and set the analyzing the financial statements your P&L”, let’s go ahead and grab both two date pickers to the first and last days of the period you are analyzing. Again, click those reports now. for your business. Update Report; switch the ‘toggle’ to Run both reports for the month just ended Details; and print. Tip: You can do this work as often as (or other period you’re analyzing), and print you choose, but we’d suggest setting them off so they are handy. Tip: As well as printing your Financial aside some time each month for Statements, click the ‘Export’ button and analysis, which also allows you to save each as a .CSV file, which will allow you look at trends in your business over to use the numbers in a spreadsheet. time.
89 We’ve seen before that the Balance Liabilities are also broken out, into Review the Sheet reports Assets, Liabilities and Current Liabilities and Long-term Owners Equity, but if you look at your Liabilities. Balance Sheet now, you’ll notice it has a Current Liabilities are pretty much the balance little more structure than that. reverse of Current Assets: obligations Your Wave Balance Sheet separates that your business is going to need to sheet Assets into Cash and Bank; Other settle in under a year (usually much less Current Assets; and Long-term than that!). Examples include short term Assets. debt such as credit card balances; money owed to suppliers; and payroll Current Assets (which include Cash and tax liabilities. and Bank), are resources that you expect to turn into cash in the relatively Long Term Liabilities are (no surprise short term - certainly under a year. So in here!) obligations that you will pay back addition to physical cash, your business’ in the long term, which is considered to Current Assets include bank accounts, be beyond 12 months. A 5-year fixed money owed to you by customers, and term loan from the bank, or credit products available for resale (and finance on a vehicle, would be examples potentially many other things). of Long Term Liabilities. Long-term Assets are things that you Current and Long-term Assets use in the business, and wouldn’t and Liabilities are separated out normally expect to turn into cash in less for a simple reason: it allows you than a year: office equipment; vehicles; tools; etc. You could sell them for cash to see at a glance what you have in an emergency, but then your in ready cash, and assets that business would be missing things it turn into cash in the short term, to needs to operate. pay obligations that are also due in the short term. What does your Balance Sheet show?
90 If you remember back to the first If the amount of income was greater than Review the Accounting Coffee Break, the basic the amount of expense, your business function of the Income Statement made a profit; if expenses were more income should be familiar to you. than income, your business turned a loss! It simply shows the income that your Just as the Balance Sheet is normally business has earned during a particular presented with a little more structure, it’s statement period, less the expenses incurred in the normal to see the Income Statement (P&L) course of generating that income. broken up as follows:
PROFIT & LOSS
Income (Revenue)
- Cost of Goods Sold
= Gross Profit
(Gross Profit %)
- Operating Expenses
= Net Profit
(Net Profit %)
The Income Statement separates out Costs of Good Sold (CoGS) from other expenses, so that you can clearly see the Gross Profit that your business generates from operations. Gross Profit is the amount available to fund your business’ regular overhead expenses, and provide a profit for you, the business owner.
91 Calculate the ������� ������ − ��������� quick ratio ������� �����������
When we looked at the structure of “Quick” in this case doesn’t refer to the Subtract any Inventory (a relatively difficult the Balance Sheet just now, we speed at which the ratio can be calculated asset to convert to cash) from your Current (although this will be a pretty simple ratio to Assets, and divide the resulting number by mentioned that both Assets and calculate). Instead, we’re using the archaic your current liabilities. “Current” here Liabilities are separated into Current meaning of “quick” which is “alive.” excludes any long-term liabilities or long- term assets that appear in your balance and Long-term, allowing you to see This gives us a framework to use when sheet. at a glance how well your Current thinking about the quick ratio: it is a pulse Assets cover your Current Liabilities. check for your business. The quick ratio gives you a number that indicates whether or not your business can The quick ratio (also commonly pay off its current liabilities using its current referred to as the acid test ratio), liquid assets (cash, and any asset that can be easily converted into cash). provides another lens to look at this question. In general, most businesses should aim to have a Quick Ratio of 1 or above – meaning all Calculate the quick ratio for your Current Liabilities can be paid from Cash and near-cash assets. business on a weekly or monthly If your Quick Ratio is significantly below 1, look deeper at the composition of your Current basis to get a snapshot of your Liabilities: ‘Current’ is a fairly broad definition, so thinking through which liabilities could actually need paying in the short term – and perhaps unexpectedly, for example if your bank business’ health that can be tracked calls a loan – will help you better decide if your business is facing some liquidity risks. over time.
92 Calculate your ��������� �������� (����ℎ���) break-even ����� ����� ������ sales
New businesses often require a few As noted before, your Income Statement Let’s say your business is already profitable, with $30,000 in Sales. How secure are you? months to generate enough sales to (P&L) shows your Sales, and your Gross Profit after deducting Cost of Goods Sold. Well, if your Sales next month come in begin to turn a profit every month. If Gross Profit is the amount available to pay $5,000 lower, with the same Gross Profit you’re in this situation, knowing what the fixed, general overheads of your Margin and same Operating Expenses, you’d level of sales you need to break even business, and hopefully deliver a profit. (In be back to break-even, so the amount of fact, Gross Profit is sometimes called sales you can stand to lose before making a gives to a target to aim at, and to “Contribution to Overhead”.) loss is: $5,000 beat. × 100 = 16.7% Dividing your Operating Expenses by your $30,000 Gross Profit Margin (both shown on your If you’re past this stage and making This gives you an idea of the ‘safety margin’ Income Statement) gives you a quick idea of profits on a regular basis, it’s still in your business’ current performance. how much your business needs to sell to useful to know how far past break- exactly break even, i.e. make neither a profit even you are. This tells you how nor a loss. For example, if your business has Break-even analysis relies on some secure your profitability is, and also general expenses of $10,000 per month, important assumptions: including that your and your Gross Profit Margin is 40%, your Operating Expenses and Gross Profit Margin helps if you’re thinking about taking break-even point in Sales is: remain consistent as you move from on more regular expenses to grow current sales to break-even sales. 40 your business. $10,000 ÷ = $25,000 Take some time to think about your 100 business. Are your Operating expenses If your business isn’t making $25,000 a fixed, or do they actually vary with Sales. Can you improve your Gross Profit Margin? month in sales, can you get there soon What else can you change? enough, or should you be reviewing your expenses? 93 Explore trends in your numbers
So far, we’ve looked at reviewing As you print out your financial statements Of course, paper and pencil records have financial statements for a single each month, look back at previous months their limitations, and this is the 21st century! to see what’s changing. period. To get the most from your The best way to track trends is to take your monthly exports of your Balance Sheet and reporting, however, it’s important to Grab a pen and make notes of any significant increases or decreases from Income Statement and build a spreadsheet track trends in your business month- previous months. Think about what you’re of month-by-month numbers. over-month. seeing, and make notes of your conclusions, Add your % change analysis, and use your or special factors that explain the numbers. When you’re busy, it’s easy for spreadsheet’s charting capabilities to build change to creep up unnoticed. This is For example, you might note: “Offered 10% trend graphs of significant numbers so that a particular risk when things seem to discount to win big Acme Widgets sale. Hit you can visually track how your key metrics Gross Profit Margin. L” be going well: If you’re having your are moving over time, and in relation to each busiest ever month ever, it’s easy to Tracking percentage changes is also other. miss that gross profit margin is helpful. Pick the largest components of your You’ve maybe heard the saying: Balance Sheet and Income Statement, and slipping, customers are paying more calculate the percentage change from last What gets measured, gets managed. slowly, or costs are rising unchecked! month to this month. Are your numbers Over the page, we suggest a few moving together, or diverging? For example, Reviewing your financial statements metrics that many businesses track if your Sales are growing 10% month-over- every month and tracking trends will month-to-month, but the key is to month, but Accounts Receivable are figure out what’s important to ensure you are not blind-sided, and growing 30%, that is something to check that you have the information you out! manage in your business, and need to drive your business forward. measure that! 94 Quick Ratio Is your business able to cover its short- term liabilities from cash and assets that turn into cash in the short term? Is this stable over time, or moving up / down?
Accounts Receivable (AR) AR is cash in your customers’ bank accounts, that could be cash in yours! If AR is growing faster than income, are you spending enough time on collections?
Income (Revenue) Overdue Portion of AR Customer Concentration Total Income, straight off your Income Check your Aged Receivables report, and How much of your Income came from Statement. Is it growing month-over- note what proportion of total AR is which customers? How much would losing month? Are there seasonal peaks and lows? outstanding longer than your terms permit. your top customer hurt your business? Are Act fast to chase overdue balances. your Sales becoming more concentrated Quotations / Estimates Issued on your top customers, or less? (Check the Bad Debt % of Previous Month’s AR Think about your Sales cycle. What Income by Customer report. predicts income 1 – 3 months down the Track how much of the previous month’s AR road? For some businesses it will be Gross Profit Margin you must write off each month to get a Quotations / Estimates issued. For others Are you giving up margin to grow total basis for estimating future bad debt losses. it may be inquiries from their website. Income? Would you be better off growing Can you improve it? Figure out what predicts future income in more slowly with better-paying customers? Inventory your business, and measure it! Net Profit If you are tracking Inventory, how is the Pending Orders / Bookings / Utilization After covering Operating Expenses, is your total value changing over time? If Net Profit increasing or decreasing? Inventory is increasing faster than Income, If your business has fixed costs and do you need to check you are holding the capacity, such as a permanent team of Is it increasing faster or slower than the correct items that current sales require, or technicians, or property to rent out, how rate your top-line Income is increasing? If could you adjust your average order size to many days’ full utilization will current slower, where is you rising income being keep inventory levels under control? orders fill? Do you need more Sales? consumed? What can you change?
95 Forecast your cash flow
Tracking trends in your business Like all accounting software, Wave is a tool As you build your Cash Flow forecast, you’ll gives you priceless insight to how for tracking what has happened. Now, we need to refer to data from Wave for your want to think about what’s going to happen. starting balances, and also to guide you on your business has been performing It’s time to step out of Wave, and fire up a suitable amounts to estimate for your over time. spreadsheet. various expenditures. So get ready by creating and printing or exporting the To help you build a good forecast for your But trying to manage your business following reports: business, we’ve put together a Cash Flow by looking at your accounting history Forecast Template spreadsheet that you can 1. Income Statements for several recent can be a bit like trying to drive by download and complete. periods. looking in the rear-view mirror. We This spreadsheet has been built using 2. Cash Flow Report for several recent need to look forward, too! Microsoft Excel, but if you don’t have access periods. to Excel, you will also be able to open it using 3. Aged Receivables Report. The single most important way to Google Sheets, which is available for free, or 4. Aged Payables Report. for a small fee as part of Google’s G Suite. “look forward” is to forecast your 5. Balance Sheet. cash. Every day, businesses that are We’d recommend creating a new forecast making sales, serving happy each month (or even weekly, if cash is tight), customers, and even operating and checking regularly to see how accurate Download the template from your forecasts are, so you keep getting better http://bit.ly/wave-cash-flow-forecast profitably, go out of business – at predicting your cash flow. simply because they run out of cash. Don’t be one of them! 96 Year-end accounting By the end of this section you’ll know how to…
Bring your record keeping up to date Check all the boxes to make sure that your financial year’s books are complete.
Review personal/business transactions Ensure that any instances where a personal account was used to pay for a business expense (or vice versa) are recorded properly.
Correct loan balances and interest expenses Adjust loan and interest expense balances to match your lender’s Year-end statement.
Recognize un-invoiced income Account for work that you’ve performed that hasn’t been invoiced. Record unearned income and customer prepayments Match payments that you’ve received with the work you’ll be doing in the next financial year.
Recognize unbilled expenses Record expenses that your business has incurred, but have not yet been paid for.
Record prepaid expenses/vendor prepayments Account for products & services that you’ve paid for, but haven’t received yet.
Check and adjust inventory Take stock of, and record any loss of valuation in your inventory.
98 Finalize your year-end
Year-end marks the point where Year-end is a significant landmark in the Completing Year-end accounting essentially having kept on top of your accounting lifecycle of your business. involves two steps: Management Accounting throughout Significant because – in most of the world 1. Bring your management accounting the year pays dividends in – it is when you need to gather and report record-keeping 100% up to date, and information in specified formats for tax streamlining and simplifying the 2. Provide the necessary reports and purposes, but also because the end of a transaction-level data to your financial accounting processes full year is when we naturally want to Accountant that he or she will need to needed to report and calculate pause to compare performance with the calculate and report your tax liability, taxes. year before, and plan the year ahead. along with any other prescribed reporting. If you’ve been following the Weekly Importantly, for businesses that are at all seasonal, comparing performance on a to Monthly and Monthly to Quarterly Wave creates all the report formats that you year-to-year basis averages out seasonal will need to give to your Accountant (CPA), bookkeeping steps set out in this impacts and lets us see the underlying so let’s get on now with completing your guide, completing your Year-end growth trends. So, even if you are already Management Accounts for the year. financial statements is going to be tracking your business performance on a There are 8 steps… pretty straightforward. If you monthly basis, Year-end is a great time to make comparisons on an annual basis too. haven’t… don’t worry – we’ll take you through everything you need to do!
99 Step 1: Bring your record keeping 100% up-to-date
You’ve been tracking income and Issue remaining invoices Finalize your last payroll of the year expenses all year in Wave, so this Any completed sales or work that you can Whether you use Wave Payroll or another invoice with a date before the Year-end: service, now’s the time to run your last really shouldn’t be hard. get those invoices out! Not only will you be payroll of the year. Be sure, too, to include A final check will make sure you getting your bookkeeping straight, any Year-end bonuses you may want to customers might even pay you! pay to yourself, or any team members. haven’t missed anything, and that you have the complete baseline Record incidental income Balance your business bank account(s) information for your year-end. Some bank interest? Affiliate Referral With everything recorded, now’s the time fees? A forgotten royalty check? If there’s to balance your bank accounts for the final income you’ve missed, record that too! time in the year. A properly balanced bank account is your Gather and record remaining bills and reassurance that all your major receipts transactions are recorded correctly. In the glove box of your car? In you wallet? Pockets of the outfit you wore to that trade conference? Check if you have any remaining bills or receipts that you have forgotten to record, and enter them now.
100 Step 2: Review personal and business transactions
Even though you’ve hopefully kept Business use of home Personal expenses paid by business business transactions separate from We discussed on Page 67 why you might It’s easy to mix up credit cards, and pay for want to record Business Use of Home on a a personal item on your business card (or your personal money in a dedicated regular, monthly basis – to get a clear view vice versa). Check your business card business bank account, there will still of your business’ operating costs. charges to make sure everything is right. be a number of areas where your If you have chosen not to record it business and personal finances monthly, decide if you want to add it now Personal element of business expenses intersect. as part of your Management Accounting Just as you can identify a business (debit Office Expense; credit Owner’s element in personal expenditures, such as Review all the areas where you have Investment / Drawings), or simply handle it for your home or vehicle, there can be a paid expenses on behalf of the as part of your personal tax filing. personal element in business expenses. business, or the business has paid for A cellphone plan paid for from your Business mileage items for your personal benefit, and business is likely to have a personal If you use your personal vehicle for element, for example. Looking at your ensure you have recorded and business purposes, you should be logging itemized bill, if you see that 30% of your documented these fully. personal and business miles, and ideally usage is personal, you should adjust for recording the expense at least monthly. this portion in your bookkeeping by means Go back to check your motor expenses are of a Journal Transaction (credit Cellphone correct. (See page 68 for more). Expense; debit Owner Investment / Drawings)
101 Step 3: Correct loan balances & interest expenses
If your business has a bank loan or In most countries where Wave is used, your 2. All payments have been recorded as other commercial loan, your lender lender will automatically send you a Year- Interest, leaving Loan liability end statement of payments made, showing untouched. will have assigned part of each how much of each payment was Interest, You have recorded too much Interest. and how much went to repay the Principal. payment that you have made to Create a Journal Transaction to debit Of course their Year-end may be different to Interest, and part to reducing the Loan liability account by the amount of yours, or the statement may never appear, outstanding loan balance principal repayment during the year; so if you don’t already have the statement credit Interest Expense. (”principal”). The split between handy, ask your bank to provide one. 3. Each payment has been split using interest and principal repayment Business owners usually record monthly estimated amounts for Interest and changes with every payment. loan payments in one of three ways. Here repayment of Principal. they are, and how to adjust for each: It’s rarely easy or convenient to You’re hopefully pretty close to the 1. All payments have been recorded as record the split every time we make correct split between Interest expense Principal, reducing the Loan liability and Principal repayment. Refer to your a loan payment, so at Year-end you account. lender’s Year-end statement to will want to make an adjustment so Your Loan liability has not actually calculate the appropriate adjustment that the total interest you have reduced this much. Create a Journal between these two accounts, and recorded for year is correct, and the Transaction to debit Interest Expense create a Journal Transaction to make amount showing outstanding on your by the amount of Interest on your the necessary change. lender’s statement; credit Loan liability Balance Sheet reflects the actual account. amount your business still owes. 102 Step 4: Recognize un-invoiced income
Back in the section on Monthly to Here’s how to handle un-invoiced income 3. Create a Journal Transaction to Debit Quarterly tasks, we looked at re- in Wave: Un-invoiced Income and credit your appropriate Sales (Income) account for 1. First, review partially-completed orders phasing ”lumpy” income. We saw the total calculated in Step 1. and customer projects. Determine the that a long project delivered over proportion of each that has been 4. Remember (in the next fiscal year) to more than one month could distort completed, and the value. For example, post additional Journal Transactions in our monthly accounts if we treat the if you had completed 30% of a $10,000 the opposite direction as you complete income it creates as all being earned project at the Year-end date, you would each order / project and invoice the full value this at $3,000 complete. sale value. at the end of the project, when an 2. If you haven’t previously done so in invoice is issued. Instead, we showed following the steps to manage “lumpy” you how recognize part of the income (refer back to Page 69), go to income each month, growing the Accounting > Chart of Accounts; Tip: Don’t record ‘speculative’ work – without value of an Un-invoiced Income scroll down to Expected Payments a firm and reliable customer agreement – as from Customers and add a new asset. Income. Un-invoiced income should only be account. Call it Un-invoiced Income. recorded for confirmed customer orders / If you reach your Year-end in the projects where you know the sale will be completed. middle of just such a project, you’ll want to recognize your un-invoiced income, to be sure your total for the year is accurate. 103 Step 5: Record unearned income and customer prepayments
Just as you’ll sometimes reach Year- We looked at re-phasing Income in Monthly 3. Figure out what proportion of the value end with income that has been to Quarterly Tasks (see Page 70.) The of your incomplete orders / projects process at Year-end is identical: remains to be delivered as at the Year- earned but not Invoiced, you could 1. Wave records the value of each Invoice end date, and create a Journal also find you have income that is as Income at the Invoice Date, balanced Transaction to debit Income; credit invoiced but not earned. by AR. We need to reduce that Income, Unearned Income (Liability) this amount. and replace it at a later date, when we You could even have invoices that 4. Moving into the next fiscal year, as the believe the Income will actually be affected orders / projects are fully have been paid by your customers, earned. delivered, post new Journal but the actual products and services 2. If you haven’t already, add a new Liability Transactions to reinstate the Income: on them won’t be delivered until account under Customer Prepayments debit Unearned Income (Liability); some time in the next financial year. and Customer Credits. Call it Unearned credit Income. Income. These should be recorded as customer prepayments. We have suggested using a Customer Prepayments-type Account called Unearned Income. If you are recording actual Customer Prepayments or Deposits – i.e. deliberately and consciously paid by your customer for future work – you may prefer to add another Account explicitly called Customer Prepayments or Customer Deposits. The accounting will be identical, by you may find these names make clearer what’s happening in your business.
104 Step 6: Recognize unbilled expenses
As at the Year-end date, had your There are two was to record an Unbilled Method 2 (Keeps Accounts Payable business incurred expenses that you Expense. ‘clean’): Method 1 (The easy way!): had not yet paid for, or even received 1. Go to Accounting > Chart of Accounts a bill for? 1. Add a Bill dated whenever your business and create a new Short Term Liability actually incurred the expense. Wave will Account called something like Unbilled Perhaps you hosted a small holiday handle this like any other Bill, meaning Expense Liability. party for customers; you had a the expense is recognized at the Bill 2. Create a Journal Transaction as at the Date; not when you pay it. caterer take care of the food, but date the expense was incurred to debit they hadn’t yet invoiced you when 2. When the ‘real’ Bill arrives, check the bill the relevant Expense categories; credit details are correct, but don’t enter it you hit your Year-end on December Unbilled Expense Liability. again! Simply pay it like any other Bill. 31st. 3. When the vendor’s Bill arrives, enter it (Note that this method will throw your Aged normally, and also create a Journal Your business has incurred and Payables reporting off a little, because we Transaction as at the Bill date to reverse benefitted from the expense, but are recording a bill before it actually arrives.) the previous one; i.e. debit Unbilled right now it’s nowhere in your Expense Liability; credit the relevant Expense categories. numbers. Record this Unbilled Expense to make your accounting more accurate. 105 Step 7: Record prepaid expenses and vendor prepayments
Just like you can arrive at Year-end Adjusting for Prepaid Expense / Vendor 3. Figure out what proportion of any with invoiced Income you haven’t Prepayments is very like the way we handle products or services you have Unearned Income / Customer Prepayments: purchased remains undelivered or fully earned, you might also have 1. Wave records the value of each Bill as unused as at the Year-end date, and recorded Expenses your business Expense at the Bill Date, balanced by AP, create a Journal Transaction to debit hasn’t yet consumed. together with directly-entered Expenses Prepaid Expense; credit the relevant paid from Cash / Bank / Credit accounts. Expense accounts. If you pay rent quarterly, and your We need to reduce that Expense, and 4. Moving into the next fiscal year, as your Year-end falls 1 month into a rental replace it at a later date, when we the business receives or makes use of these quarter, if you’ve recorded the full Expense will be consumed. products and services, post new Journal quarter’s rent, you’re applying too 2. Add a new Asset account under Vendor Transactions to reinstate the Expense: much to the current financial year: 2 Prepayments and Vendor Credits. Call debit the correct Expense accounts; it Prepaid Expense. months’ of the quarter’s rent belong credit Income. in the next year. As with Unearned Income and Note that there is no accounting difference between Prepaid Expenses that exist because your business has not fully received or consumed purchased products or services, and a deliberate pre- Customer Prepayments in Step 5, payment to a vendor for services that will be delivered wholly in the next financial year. For clarity, resolve this by adjusting for Prepaid however, you might wish to distinguish these as Vendor Prepayments. Expenses / Vendor Prepayments.
106 Step 8: Check and adjust inventory
If you’re a service-based business Goods that you purchase for re-sale, or 3. Straight to CoGS: if your inventory with no inventory, feel free to skip materials and resources that you use to levels don’t fluctuate much, you may create your product or service, are either have chosen to simply record all your along to the next section. If you’ve used straight away and accounted as Cost purchases as CoGS, and not track been tracking Inventory as described of Goods Sold (CoGS) expenses, or are kept Inventory at all. This could be accurate in the Monthly to Quarterly Tasks within your business as Inventory to be enough for your day-to-day needs, but used over the weeks and months to come. If still needs adjustment at Year -end. section, you’ll be familiar with the your business accumulates inventory, you Whichever approach you’ve taken, your inventory tracking processes. (If not, should have been tracking this in one of Year-end Inventory adjustment essentially three ways: refer back to Page 76 to read about applies a Periodic approach: you’re going to the Periodic Method of accounting 1. Perpetual method: recording all check what inventory you have on hand, for Inventory.) purchases into your Inventory asset, and adjust your accounts so that they and using Journal Transactions to match this reality. However you’ve been approaching record inventory being consumed in Turn over the page for a summary of the CoGS on a sale-by-sale basis. Inventory, get ready to do some different adjustments you might make… counting. At Year-end you want to 2. Periodic method: recording all take particular care that the purchases into a dedicated ‘Purchases’ asset account, and updating Inventory Inventory value reported on your and CoGS maybe monthly, based on a Balance Sheet matches what you physical count. actually have available to your business. 107 How to The physical Inventory you have is less than your Balance Sheet shows adjust The physical Inventory you have is more Inventory … because you used more inventory than your Balance Sheet shows if… than you realized in delivering your ... or because some of your Inventory product / service has been lost, stolen, or destroyed You use the You have likely under-recorded purchases You have likely over-recorded purchases of Using the perpetual method, the inventory Perpetual of inventory, or over-recorded use of inventory, or under-recorded use of you have available should match what your method inventory as CoGS expenses for sales. inventory as CoGS expenses for sales. Balance Sheet says at all times if your Check your expense transaction records to Check you inventory purchase transaction bookkeeping has been accurate. If it see if you have mis-categorized any records to see if any should have been doesn’t, common reasons are theft, inventory purchases as expenses. Review categorized as simple expense transactions. breakage, fire or flood damage, etc. These are collectively referred to as ‘Shrinkage’, your Journal Transactions to see if you have Review your Sales history to ensure there is which is a general Expense. duplicated transactions, or applied too a Journal Transaction that applies much CoGS expense against Sales, and appropriate CoGS against each sale. To account for ‘Shrinkage’, add this as a correct your bookkeeping as required. new Expense account, and create a Journal Correct your bookkeeping as required. Transaction to debit Shrinkage and credit Inventory as required.
You use the You have previously under-recorded You have previously over-recorded The Periodic method relies on counting Periodic Purchases, or applied too much CoGS Purchases, or applied too litltle CoGS physical inventory, and assumes that all the method expense. expense. difference between your last inventory Check your expense transaction records to Check your expense transaction records to count (plus purchases since then) and your see if you have mis-categorized any see if you have mis-categorized any present inventory account is attributable to Purchases as expenses; make corrections. expenses as Purchases; make corrections. CoGS. This makes it hard to identify Shrinkage. If a difference remains, create a Journal If a difference remains, create a Journal Transaction to debit Inventory for the Transaction to debit CoGS and credit If your inventory count reveals a pile of difference; credit CoGS. Inventory for the difference. broken, unsaleable items, however, you could certainly categorize these as ‘Shrinkage’.
You record For convenience, you are treating all For convenience, you are treating all Recording purchases straight to CoGS purchases purchases as CoGS, but in fact the unused purchases as CoGS, but it looks like you makes sense when either the amount that straight to purchases you have on hand have increased actually started the year with some you are purchasing to support your sales, or CoGS since last year. inventory on hand, and you’ve used some of the change in inventories month-to-month, Create a Journal Transaction to debit that up along with whatever you’ve is small. Inventory so it matches your physical purchased in the year. If you are accounting this way, there is likely inventory on hand; credit CoGS. Post a Journal Transaction to debit CoGS to be little benefit in attempting to track and and credit Inventory so it matches your report ‘Shrinkage’. physical inventory108 on hand. Congratulations! Your year-end management accounting is complete!
With all your adjustments completed, Your Management Accounting records also With these reports, your CPA now has all the you now have a full picture of the include all the transaction data that your information they need to finalize any public CPA requires to calculate and report your reporting that may be required on an income earned during your financial taxes. Accruals basis, as well as any tax year, and the expenses incurred to calculations that may be required on a Cash Here’s what you should plan to share support that income. You also know basis. (export all Reports on a Detailed basis – as – as of the end of the year – what opposed to Summary): They can also see all your investments in your business has, what it owes, fixed assets through the year, so they can § Your Income Statement (P&L) for the calculate the correct capital and… yes… what’s left for you, as year. allowances/depreciation allowances, as well the owner! § Your closing Balance Sheet at the end of as any other charges you’ve applied to Take a moment to review your Year- the current year. understand and reflect the realities of your end Financial Statements, just as you § Your closing Balance Sheet at the end of business, that may need to be adjusted and have been every month. If this isn’t the prior year. replaced with ‘official’ tax calculations. § Your Cash Flow Report for the year your first year in business, compare Depending on your business structure, it (select ‘Cash and Cash Equivalents’). your business’ performance this year may be liable to tax, independent of any § Your Account Transactions (General personal taxes you pay. In this case, your to last, and think about goals for the Ledger) Report on an Accruals basis.* Accountant will let you know the Tax year ahead. § Your Account Transactions (General Expense to add as a final Journal This is also a great time to export Ledger) Report on a ‘Cash and Cash Transaction in your bookkeeping. information to share with your Equivalents’ Basis*. And now you’re really done! accountant, so they can complete Congratulations! your tax filings for the year. 109 Bonus tip: What to do if you don’t have an accountant and are filing your own taxes
There are many advantages to To file your own taxes, you’re going to be Fixed Asset purchases are found on the working with an accountant (CPA) as using some of the same six reports we Account Transactions (General Ledger) identified on the previous page, so go ahead report. Your tax preparation software should you complete your Year-end. A good and print / export them now. You’re also use this information to calculate Capital / CPA may find tax allowances and going to need a set of tax forms from your Depreciation allowances. (If you file taxes on deductions that you would not know local tax authority, or some software to an an Accruals basis – be sure to deduct about yourself, saving you money – prepare and submit your tax return online. Depreciation from your expenses, so you’re not claiming twice!) and they may prevent you making Good online tax preparation software will mistakes that could come back to guide you and provide you lots of You may need to also add back Business bite you in an audit. Also, a good information about what numbers to include Use of Home and Business Motoring in every part of your tax return, so using tax expenses if you are claiming these as accountant can be a valued advisor preparation software is a great choice. personal deductions: you can’t deduct them to your business all year round. twice! Note that if you recorded these Let your tax preparation software guide you, expenses via Journal Transactions, they If your business is still at its early and refer to your Wave reports for each of won’t appear on any of your Cash-based growth stage, however, the cost of the numbers you are asked for. Here’s Reports; Journal Transactions only appear where you’ll find the main numbers: using a CPA may seem out of on Accruals-based Reports. balance with the kind of income you Total Income comes from your Income Continue through your tax preparation Statement if you file on an Accruals basis, or are making, so you may be thinking software, locating all the numbers you need your Cash Flow Report on a Cash basis. of “going it alone” at Tax Time. on your Wave reports until you’re done. Expenses come from your Income Taxes are different from country to Statement (Accruals basis) or Cash Flow Double-check everything, and submit country, and even at more local Report (Cash). when you’re ready. Well done on levels, so we can’t give you specific reporting your own taxes! tax advice. We can set you on the right track, however. 110 Comprehensive checklist
111 The bookkeeping cycle
Daily/Weekly Capture receipts Upload photos of your receipts and store them in Wave.
Invoice Clients Use Wave’s Invoicing feature to send invoices to your clients and get paid.
Record and categorize transactions Track your transactions and categorize them appropriately.
Record business mileage Log business use of your vehicle outside of Wave. Record invoice payments Record payments received for your invoices.
Record bills Record any owing bills.
Record non-income and non- Account for any deposit and withdrawal expense transactions transactions that aren’t income and expenses. Weekly/Monthly Pay and record payment of bills Record payments for any bills that were recorded earlier in the period.
Run Payroll Review payroll and pay your employees.
Review Aged Receivables Manage your overdue invoices to bring down your bad debt.
Reconcile bank accounts Reconcile your Wave transactions against those in your bank statement.
Monthly/Quarterly Report & remit sales tax Identify any sales taxes owed and correctly account for their payment.
Record Amortization/ Accurately record the value of your assets over Depreciation time. Expense business use of home Record and account for office space and services that you provide within your home.
Re-phase income Match income made over time with the work and materials that went into it.
Write off bad debt Record bad debt when customers don’t pay.
Track inventory Record the value of your inventory as it’s purchased and sold.
112 The analysis cycle
Monthly Analyze your financial statements Read and interpret your Balance Sheet and Profit & Loss Statement to get meaningful insights for your business.
Calculate and track the Quick Ratio Determine whether or not your business can pay off its current liabilities with its current liquid assets.
Calculate Break Even Sales Determine the exact point at which your business will make neither a profit nor a loss.
Explore trends in your numbers Note trends month-over-month to give you the information you need to continue driving your business forward.
Forecast cash flow Use previous periods’ numbers to forecast your business’ cash flow and help anticipate its financial needs.
Year-End Accounting
Yearly Bring your record keeping up to date Check all the boxes to make sure that your financial year’s records are complete.
Review personal/business transactions Ensure that any instances where a personal account was used to pay for a business expense (or vice versa) are recorded properly. Correct loan balances and Interest Adjust Loan and Interest Expense balances to match Expense your lender’s Year-end statement. Recognize un-invoiced income Account for work that you’ve performed that hasn’t been invoiced.
Record unearned income and Match payments that you’ve received with the work customer prepayments you’ll be doing in the next financial year. Recognize unbilled expenses Record expenses that your business has incurred, but have not yet been paid for.
Record prepaid expenses/vendor Account for products & services that you’ve paid for, prepayments but haven’t received yet. Check and adjust inventory Take stock of, and record any loss of valuation in your inventory.
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