And now the module. I know you've been waiting for this entire time,
the accounting basics module. Well, fortunately for you and for me, uh,
this is not a 16 hour class on managerial accounting. Um,
so I'm gonna save you that pain, been there, done that, uh,
and focus on what you as a business owner actually need to know from a
conceptual perspective to just be able to oversee operations.
And then you can outsource this stuff, uh, bookkeeping tax prep, to a cpa,
uh, from there. So it's always easier to manage stuff, uh,
when you have an idea of what's supposed to be happening and then have someone
else do the legwork. So, setting up a system, basically we have,
you know, lots of options out there. These are kind of the two most popular,
I would say, uh, the Oracle NetSuite or Intuit QuickBooks. Um,
both of them have a learning curve if you have to do it yourself starting out,
I would say probably the QuickBooks is the easier route to go if you're gonna
have to be self-taught initially before you can, you know, hire or outsource,
uh, this to someone else.
If you have employees and are planning on doing payroll stuff,
I highly recommend doing a payroll service,
cuz doing that on your own is a massive drain on your time. Uh,
and you will probably be losing money doing that for sure.
So QuickBooks has built-in options. It's pretty cheap.
I'm sure Oracle does as well. Um,
but I would highly recommend investing in a professional setup on either one of
these. Um, if you're not already a little bit, um,
versed in accounting at how it works. So next week, overall,
very sophisticated, very customizable,
but it has a steep learning curve and is a lot more expensive.
So if you're not running, you know, multiple employees,
different brands of business,
like you're not already scaled up to a certain degree,
probably if you're at that level, you already have an accounting software. Um,
but starting out QuickBooks, easier to learn, very cost effective,
a little less customizable,
but you don't typically need a ton of customized customization options if we're,
you know, selling a product or selling a, uh,
like a coaching service or something. Um, there are some quirks there that are,
uh,
a little bit beyond what we'll get into here as far as processing through that,
but they're not too hard to work around if you have someone who's familiar with
QuickBooks to help you with that. So these systems,
they will let you connect to your bank account,
automatically categorize revenue and expenses. You can preset rules.
So a lot of it can be automated so you don't have to pay someone to manually do
everything, which can be a great time saver. Um, I'd say, you know,
if you look into it,
it maybe takes like 15 minutes to learn how to set the rules and customization.
So, you know, if you spent two hours,
you could probably set this up on your own. Um,
but the basics for setting this stuff up, if you're just gonna, you know,
run through it yourself, and I've done this more than once, um,
typically when you're setting up your chart what's called a chart of accounts,
which is basically just the numbers and names of where all the money goes to and
comes out of, um, typically you're use
A three or four digit number system. The first one is pretty basic. Uh,
it's just the overall category. Is it an asset? Is it a liability?
Um, which is gonna be like, you know, uh, breaking it down to like your assets,
obviously your bank account if you have an equipment thing, uh, stuff like that.
And then liabilities will be like, you know, taxes, rent expense,
that kind of thing. Uh,
the second digit is gonna be like the individual items within that category. Uh,
so maybe you have multiple bank accounts, so maybe you have a digit for banks,
and then the next digit over, you'll have, you know,
your PayPal or your Wells Fargo or your Chase or whatever account,
what bank account you're using there.
And then the third and fourth digits would be subcategories of that.
So for example, if let's say, uh, we had transaction fees,
sub-category of that could be, uh,
a bank transaction fee versus a PayPal transaction fee versus a merchant
processing fee. Stuff like that.
Don't need to get into that too detailed right now.
Just want to give you kind of the breakdown, the standard numbering system,
the 100 s or 1000. So that first digit is gonna be your assets, like I said,
number two's, liabilities, equity, revenue, and then expenses.
We started to talk about capitalize versus expense.
This is where we'll explain that a little bit more. Uh,
so an asset that's gonna be providing you benefits for over a year,
we typically have to capitalize that,
meaning we're going to record it as an asset,
and then over the time that it's being used up.
So typically this will be a depreciable thing that's not holding its value.
We will input a depreciation or amortization expense.
Just for clarification,
a depreciation is on a tangible asset like a computer, a car,
a, you know, lap pull down hack squat.
Whereas an amortization would be an intangible asset. So for example, if you,
uh, paid money to have a website built because that technology, you know,
technology advances,
then the existing technology becomes less and less valuable.
You might write an amortization expense to decrease the value of that website
over time. And there's lots of charts online if you type in like, um,
useful life and then type in an asset name,
whether that's useful life of a car, useful life of furniture,
it'll basically give you the formulas to calculate all this stuff if you need to
do it yourself. Um, but again, I would just hire an accountant to do it.
This is just so you understand, are they doing a depreciation schedule?
Are they amortizing things? Are they capitalizing what they should be?
Just so you can look over the financial reports,
make sure as a business owner things are being done, app,
they're being done appropriately and nobody's cutting corners.
Um, so the main impact on the taxable income for this stuff, uh,
capitalize versus expense is just the timing. Uh, I mean,
essentially it's going to reduce your taxable income,
whether you do it as an expense now or, you know, depreciate it over time.
But at least in the US the IRS is kind of picky and I'm sure, uh,
the, uh, tax, uh, overseers, uh,
wherever you are will be as well.
So make sure we're doing that correctly and you're not just dispensing
everything in the first year. And we, as we get into taxes in the next unit, uh,
I'll give you some tips and not technically tricks, but, uh,
methods that might help you reduce that, uh,
taxable income even further and pay a little bit less to the government.
So set up, we typically have two revenue recognition systems,
if you're not familiar with this. Uh,
so typically we'll have what's called cash recognition or accrual recognition.
All that means is when you're paid something from a customer,
do you actually mark that down as revenue immediately
or do you first mark it as a liability? And then as you perform the services,
you recognize or transfer that amount from a liability to, you know,
your asset or your income.
The reason you do one or the other comes primarily again, uh, kind of down to,
uh, both prediction taxes, um, and then, you know,
sometimes just being more accurate in general. So for example, if you're doing,
you know, multi-month coaching packages, annual memberships of any kind,
and they pay a lump sum upfront,
that typically would be better done as an accrual recognition system.
Meaning you take that, you know, let's say they pay you a thousand dollars, uh,
for 10 months, so it's a hundred dollars a month, take that a thousand dollars,
put it in a liability account as unrecognized revenue.
And then each month as you are providing the service,
you would recognize a hundred dollars and transfer it from a
liability into revenue, an asset, or you know,
a ca a increase in your cash available.
What that does is at the end of the year,
if you've only serviced half of those 10 months,
you've only recognized half of that revenue. That's what you are taxed on.
You don't get taxed on the other 500 until you actually complete
that service. So, just helps with accuracy's sake.
If you're delivering PDFs, uh, they buy a workout, they get it right away.
That's all cash reco, crash recognition stuff. Um,
typically you're not mixing these two things. Um,
so of course if you're doing an accrual system and someone buys a product,
you deliver it, you recognize that right away. Um,
if you're doing a quote unquote cash, uh,
recognition system and they buy a long-term contract,
you recognize it right away, but you're also going to, you know,
if the the tax period comes along before they've finished receiving,
uh, what they paid for, you're going to be taxed on all of that revenue.
Just minor details there. So looking at,
Uh, the depreciation stuff, that is actually not a bad thing.
I would definitely not neglect doing depreciation.
It's what's called a cashless expense,
means it's something that we actually get to use that lowers our taxable income,
but we're not technically still handing out cash, uh, for that expense.
So, um,
unless you're basically looking for people to invest in your business or you're
trying to get major loans and stuff, um,
trying to keep your value of assets super high on the books doesn't necessarily
help you. If you're a privately run business, you don't need loans,
you're self-sufficient, you run your own show, you're not selling stocks.
The amount of assets on your books doesn't really mean a whole lot unless you
get sued. And then, you know, somebody might try and come after your assets.
So make sure you're doing those depreciations. Um, it will work in your favor,
especially as we get into taxes in the next unit. Um, basically the,
of course, the more or the less, uh, net income you have,
the less taxes you have to pay on that.