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One of the confusing things with Lizzy is when you are told to make adjustments to your Owner’s Equity/Retained Earnings account. And it will never fail to throw your accountant into a tizzy. So let me explain what we mean, and why we mean, to help smooth things over with your accountant. Also, for the rest of this article, I will be referring to Owner’s Equity and Retained Earnings as OE/RE, which is the same thing, depending on your ownership. Corporations use Retained Earnings, Business Owners/Partners use Owner’s Equity – but its the same thing. Its simply the business ‘Ownership’ accounts – in a corporation which is owned by Stockholders, the Equity accounts show Stock and Retained Earnings values of ownership, while in a sole proprietorship or partnership, the Equity accounts show the Share of Ownership, what has been contributed by the Owners, what has withdrawn by the owners, and what profit/loss has been distributed to the owners. But it is all the same thing with different names.
But I digress…
When you are told to adjust Equity, you are being told to do that for 1 reason, and 1 reason only. To enter/adjust your starting figures into Lizzy. We understand that the vast majority of our clients are coming from another system to Lizzy. Lizzy understands this as well, and as part of her functionality, has 2 items to note for inventory. Both are in Settings > General > Company Info. The first is “Date We Started Using Lizzy”. This is your ‘Go Live’ date, and the date Lizzy uses for her internal adjustments. The other is the “Initial Inventory is Complete” check box. While this check box is unchecked, any inventory adjustments you make Lizzy assumes to be part of the inventory loading process, and adjust for the day prior to your “Go Live” date. Once your final inventory adjustments are done, you check the Complete check box, and then Lizzy makes inventory adjustments for the day you do them.
However, this causes an oddity to your Profit / Loss Statement, and that is that Inventory Shrinkage all of a sudden has hundreds of thousands of dollars ( or more ) as balances, which of course is wrong. Those figures need to be adjusted. And at the same time, so do all of your other figures from your Balance Sheet, and Profit / Loss system up through your Live date. How do these beginning numbers get into the system? Through GL Adjustments offsetting ‘Equity’. I’ll now pause for the exclamatory screams from all of the CPAs.
But wait, and think for just a moment. What is Owner’s Equity/Retained Earnings account for? It is fluctuation of all of your Business Activity for a given year. Well, what are you doing? You are making the biggest fluctuation you ever make by changing your business system to Lizzy. So, in a way, it makes sense to adjust your OE/RE account as we enter our values.
But the other aspect is that because you are using a business system, you have to make adjustments separately to get values into the system. Lizzy prevents you from adjusting her protected accounts ( Inventory, Receivables, Payables, Checking, etc ) directly from the General Ledger, as by doing so would create an imbalance between the GL and each specific subledger. As an example, Lizzy tracks Inventory by each and every part that you tell her about. So, if your GL says you have $100000 in item inventory, Lizzy doesn’t see $100000 as a single value, she see’s it as thousands of parts with varying values that sum up to $100000. But, if you make a GL Adjustment to Inventory, how is Lizzy supposed to account for it. She still see’s the same thousands of parts the sum up to $100000. The same holds true for all of her protected accounts. That’s why she won’t let you adjust these accounts in the GL. You need to tell her specifically what parts are no longer there, otherwise she has to assume they are still there and have value, because, to her, she can prove they are still there being counted.
So, to enter the initial values on these accounts, you need to do so separately from the GL Adjustment form. So, for your Accounts Payables, you go enter Expense POs offsetting OE/RE. For checking, you enter a beginning balance, offsetting OE/RE. Same with receivables, you enter each customers balance, offsetting OE/RE. Inventory, because inventory adjustments are a regular part of business activity, offset Inventory Shrinkage. So you’ll need to adjust Inventory Shrinkage into OE/RE.
However, once all of your protected accounts are entered this way, you have all of your other assets, liabilities, and equity balances you need to enter, plus the income, costs, and expense accounts since the beginning of your fiscal year. I always suggest when doing so you do each section separately, to make it simpler to track any mistakes that could be made. So you’d enter all your Other Current Assets as a GL Adjustment, offsetting OE/RE. Then your fixed assets, and so on and so forth. Naturally, you would date everything for the day before your Go Live date. When you get to your P&L items, I always suggest breaking those down by month ( so if you started Lizzy on May 15th, as an example, I would enter my P&L items by month. So I would enter Jan Income, offsetting OE/RE. Then Jan Costs, then Jan Expenses. These I would date for the last day of the month ( Jan 31, Feb 28/29, Mar 31, etc ). By doing these this way, I can run P&Ls for the month for these months, and use them for comparisons for next year and future years. Then, when I got to May, I would do the same thing for May 1-14, and date it the 14th.
Once you’ve done all that, and if you did it correctly, your Trial Balance/Balance Sheet from your old system should match Lizzy as of the day before your Go Live Date. INCLUDING your OE/RE account.
Now – there will be occasions where this doesn’t balance. This is because those protected accounts don’t match up. Meaning your Trial Balance in your old system will be $110K, but Lizzy says $100K ( because those are the parts you told her about ). Now at this point, either there are $10K worth of parts missing that didn’t get entered, or your old system’s Balance Sheet was wrong ( which I find more and more to be the case, simply because of how your old system tracked parts, or allowed you to make adjustments to these accounts that weren’t really right ). To fix the protected accounts, you basically make a non-protected account similar to the other accounts for conversion adjustments. So, for our example, I would create an Inventory account named “Lizzy Conversion Adjustments” and put my missing 10K in there, offsetting it to OE/RE ( which should also be short 10K ). Point being, if your Balance Sheet/Trial Balance balances in your old system, you should eventually be able to get it to balance in Lizzy for your Go Live date, based on these adjustments.
And that is what we mean by adjusting your OE/RE accounts.
( For the record – at no other time, and for no other reason – do we recommend making manual adjustments to OE/RE. )
How does Lizzy handle her accounting? The answer to that is that she runs an Accrual Accounting Basis, with a slight exception regarding invoicing.
First – why Accrual Basis?
Well – lets define for us cash-basis vs. accrual-basis accounting. Cash basis is where income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. Accrual basis is where transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid.
GAAP ( Generally Accepted Accounting Principles ) state that you MUST use an accrual basis accounting method if a) your business has sales of more than $5 million per year, or b) your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year. As most of our dealerships have no problem meeting this second criteria, we use accrual basis.
However, it has been brought up, why do we not have transactions take place when you complete a repair order, or when you complete a job on an invoice? Good questions. In simplistic terms, to make things cleaner, Lizzy only considers it a transaction when you cashier the invoice. Lizzy handles it this way because we, the user, are human beings, and we make mistakes, and un-complete jobs to make changes or add parts, and frequently do so multiple times. We also edit complete invoices that haven’t been cashiered, also adding parts or miscellaneous items to them. To refrain from seeing hundreds of GL transactions for an invoice, because we’ve completed a job, then uncompleted it, made changes, completed it, uncompleted it, made more changes, etc… Lizzy keeps all this at bay by considering it a transaction at the time of cashiering – even if you don’t pay right now ( by putting it on account receivables ).
With this minor exception – Lizzy handles all other accounting processes via the accrual basis method.
If you want to see “Cash basis”, there are several articles you can find via Google that will explain how you can look at your accrual system as if it were cash basis ( involving removing receivables from income, and payables from expenses ).
I wanted to take a few minutes to let everyone know that we’re at this years Power Sports Business Profit Xcelerator 2011 and are surprised by how few dealers actually took advantage of all of the information available here.
Each hour there are a couple different sessions going on that cover topics from how to better run your shop, to getting the word out through Facebook and twitter. The dealers that I’ve spoken to seem very happy with the content of the show and I have had the chance to sit in on a couple of the classes and found them very informative.
Overall we have had a very successful showing, but I hope that next year more of you guys find your way here. It is well worth the time and money to learn better ways to do things and how to improve your bottom line. Fresh looks at how to do the same day to day business, but sell more parts and make customers happier to insure they return to do more business with sooner rather than later, are things you could all use.
We attend a lot of shows and dealer meetings throughout the year and I have to commend the people at Powersports Business for putting on a very professional show and providing a lot of useful and relevant information to the attending dealers. They have also gone out of their way to make all the vendors feel at home and part of the process so we thank them for that as well.
We have enjoyed the show and are sure we’ll be attending next year and expect more of you guys to come join us.
From Vegas
Starting today nizeX Inc. is moving away from GotoMeeting and SSI/Nizex Remote, and moving to Mikogo. Mikogo is a free web conferencing package, that is cross platform and supports remote control of another user’s desktop.
The first step in getting Mikogo setup is to install the software, using one of the links below.
Mikogo provides a straight forward explanation of how to install their software, so there is no point in rehashing it here.
Once the software is installed, it’s time to start a session. First thing is for all parties to start Mikogo, if you are on Windows just double click the Mikogo icon in the system tray, Mac users will need to click on the icon in there Applications folder, and Linux users will double click on the icon in the Mikogo folder that was created when you unpacked the tar file. Now, whoever is going to host the web conference will need to click the button that looks like a red power button and click Start Session, this will start a new session and provide a session ID. The host/presenter should now provide the session ID to everyone who is going to join the web conference. Next, the people who are going to join the web conference will click the button with two people in it, it is the first icon to the right of the power icon. Once the join session button has been click the attendees can simple enter the session ID, choose a name, and click the Join Session button.
Now that you know how to start a web conference, there are a few useful features that everyone should be aware of:
Once the web conference is done, the presenter can close the conference by closing the Mikogo window. The Mikogo icon should stay in the system tray and a new session can be started at anytime by double clicking that icon.
Various states handle sales tax collections in various ways, but one of the more difficult to grasp concepts is prepaid tax. The easiest way to describe it is to give you an example. In Ohio, if you pay enough sales tax to qualify, they require that you prepay your tax. For simplicity we will talk about the 3rd Quarter ( July, August, & September ) and their payment months ( August for July, September for August, and October for September ). So what would happen is in August, when paying your sales tax for July, you would be required to not only pay the July amount ( lets say $25000 ) plus you would be expected to pay what you estimate ( or collected to this point ) for August ( lets say $19000 ) – so in August, you write a check to the state for $44000. Now September rolls around, and its time to pay for August. So now, your tax due for August is $22000. But now you get to deduct what you prepaid for August back in August ( that $19000 ) so we only owe $3000. But we still need to prepay for September ( lets say $23000 ) – so in the end, we would write a check to the State for $26000 ( 22000 – 19000 + 23000 ).
Now slightly different are states like California where you prepay monthly and settle quarterly. So using our 3rd quarter example, in August, you would write a check for $25000 for July. In September, you would write a check for $22000 for August. In October, you would do your sales tax for July – September and determine you owe the state $74000 in sales tax. So you would write a check for $27000 ( $74000 – $25000 – $22000 ).
So now that we understand why we have to do this, and how we do it manually – lets see what we do in Lizzy.
First, if we don’t have a PrePaid sales tax account set up, we should do so.
Go to Accounting > Chart Of Accounts > View Accounts, and from there we will add our PrePaid Sales Tax account. We suggest we make this an ‘Other Current Asset’ type of account, so lets make 140.00.000 or Master account, so it will be grouped on the Balance Sheet properly. Account Type should be “Other Current Assets”. Account Number – we suggest 142.00.000 - but choose another if you already have a 142.00.000 or want a different number ( or use a different numbering sequence ). And as an account name – Prepaid Sales Tax will do ( or name it what you feel you’ll need it to say. ). Please keep in mind, for the rest of this example, I will be using these accounts, so change them appropriately below.
Now we need to tell Lizzy that we have a prepaid sales tax account, so we head to Settings > General > Tax Rates, and right next to our Save button we have PrePaid Sales Tax Account. Select your new account ( 142.00.000 ) and click Save. You will get the following message: “Error: You must enter a name, select an account and select a tax vendor to continue.” Please ignore this and click Close Window. The error is a guardrail so it doesn’t save a tax item without a name, account or vendor. Since we just wanted to save the Prepaid account, we can ignore the error, and move on.
Now, Lizzy knows our prepaid sales tax account, and will use it on our tax reports. At this point, we assume you already have a “Generic Tax Report” configured in your Tax Reports. Handling prepaid sales tax assumes you using Lizzy’s Generic Tax report functionality.
So at this point – business goes on normally until its time to pay your sales tax. If you do NOT do quarterly tax assessments, then skip to the next paragraph. If you do quarterly taxes, and have already paid into the quarterly fund, you will need to move the money from whatever account you hit on your sales tax prepayment check to your new Prepaid Sales Tax account. So do that through a GL Adjustment. At this point, it should either be the first check in your quarter your about to write, or what you’ve paid so far for the quarter is in your Prepaid Sales Tax account. Now, for the current assessment, we simply write a check to our Tax Vendor for our prepayment amount, and offset our new Prepaid Sales Tax account.
Now for our quarterly reconciling, or our monthly payment handling, we move to our tax report. Going to Invoicing > Reports > Sales Tax Report, and setting our date range, and select our report to generate, then click Generate. On this report you should have all the figures you need to fill out for your state filing report. When we are ready to generate the check, we click “Pay Sales Tax from This Report” in the middle of the screen. MONTHLY FILERS: At this point, you may want to run this report for the current month, to get an idea of how much you need to prepay for this month. So do that, and get your amount to prepay, and write it down. Then regenerate your current payment month and click the Pay button.
On our payment form, you’ll see all the taxes you currently owe ( through your end date ) for the various tax vendors you have. Check the pay button on the right for all the tax municipalities you will be paying right now. Towards the bottom of the report, you’ll notice 2 lines that say “Estimated/PrePaid Last Month” and “Estimate to Prepay This Month“. While the descriptions are mainly for the montly filers, these are the fields you quarterly filers will use as well. By default, both of these lines should have your prepaid sales account in them ( because we told Lizzy what it was earlier ). And because of that, Lizzy was nice enough to go gather how much we’ve prepaid already in to our sales tax, and filled that in.
QUARTERLY FILERS: At this point – if you’ve checked all your tax items, the total to pay at the bottom should be what you now owe ( your prepaid amount has already been subtracted from the tax total for your check calculation. ) You may jump down to the paragraph following the Monthly filers.
MONTHLY FILERS: At this point, all you need to do is enter that number we wrote down earlier for the current prepayment and enter it the “Estimate to Prepay This Month” Amount column. It should increase your check total.
ADJUSTMENTS: If your paying late, or your state is nice enough that if you pay early or on time, you get to take a small deduction ( lets say .75% ( or 3/4 of 1 % ). We can go to the Enter Adjustment Info line and enter a ( – ) negative amount to deduct, or a positive number if we owe a late fee, and then select what account we want this to hit. ( The accounts only allow you to look at other income and other expense accounts ).
At this point – we should be ready to process our payment. If we want Lizzy to write our check, she’s already to do it, so we just click “Process Payment(s)” and she’ll write our check. If we want to pay later, and want a PO instead, we can simply click Create Payables, and Lizzy will go write payables up for our sales tax.
Either way, congratulations! You’ve handled your Prepaid Sales Tax assessment properly.