Destinations of Bookkeeping Framework - PowerPoint PPT Presentation

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Destinations of Bookkeeping Framework

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  1. Objectives of Accounting System • Timely and accurate picture of performance • Generate financial reports for management, lenders, creditors • Facilitate filing of tax returns • (sales and payroll taxes more important than income tax) • Prevent and detect fraud, waste and theft

  2. Methods of Accounting • Types of methods • Cash basis • Accrual basis • Hybrid (modified cash or accrual)

  3. Choice of Method • Tax Requirements • In general, cash basis is preferable for tax purposes • Accrual required for tax if significant: • Inventory • Account receivable

  4. Tax Vs. Book Accounting • Different overall accounting methods can be used for tax and financial reporting purposes • Even if same overall method used, different specific methods can be used (i.e., depreciation) • Exception is LIFO inventory

  5. Cash Basis Accounting • Simplest Method • Appropriate for many small businesses • Not allowed for tax if significance inventories, or gross receipts exceed 5 million • Cash can be used internally, and adjusted to accrual for year-end reporting

  6. Accrual Basis Accounting • When significant receivables and inventory exist, cash basis accounting will not accurately reflect income • Accrual accounting does not accurately capture cash flow • However, income is best predictor of future cash flows

  7. Comparison of Cash vs. Accrual Cash Accrual Beg. A/R 20,000 - Sales for month 120,000 120,000 Ending A/R (40,000) - Reported Sales 100,000 120,000

  8. Different Tax and Reporting Methods Financial Tax Sales 500,000 500,000 Other exp. (480,000) (480,000) Depr. ( 2,000) Sec. 179 (10,000) Net Income 18,000 10,000

  9. LIFO Inventory(Last-In, First-Out) • LIFO inventory reduces taxes when inventory prices are rising • Must also be used for financial statements (FIFO usually disclosed) • Provides additional deferral timing option • Taxes can be affected by timing of inventory purchases

  10. LIFO Inventory • LIFO Pitfalls • Write-offs for obsolescence not allowed • Unplanned inventory liquidation can result in large tax bill by including old, “cheap” inventory in cost of goods sold

  11. Value of LIFO Inventory Value in Yr. 1 $ 1,000,000 (LIFO value) Inflation 5% FIFO value in 10 years (1.05)10 x 1,000,000 1,628,900 Difference 628,900 Tax Rate 40% Cumulative Tax Deferral $ 251,560

  12. Accounting Systems • Integrated with inventory, accounts receivable • Payroll - almost always better to use service bureau • don’t have to worry about changes in law, rates Don’t get behind on payroll taxes!

  13. Various Taxes Tax Form Rate Sales Tax State 7% (NY) Withheld taxes FICA&Med. 941Varies Federal State Employer FICA 6.2% Medicare 9412.45% FUTA 940 0.8% State State

  14. External Reporting Type of Level of Est. Est. Report Assurance Cost Loan Size Audit Positive Expen. $1 mill + Review Limited 1/2 audit < $1 mill. Compilation None Minimal < $200k

  15. Accountant Reports • Type of report may be negotiable with bank • CPA reports can also be issued for forecasts and projections included in business plans or loan applications • Don’t place undue reliance on an audit report when evaluating a buyout candidate