Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! As we approach the end of the year, tax season steadily approaches. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!
 
As with anything valuable, your tax information must be kept safe. Our last article was a security guide for how to protect your personal information from scammers, cyberattacks, and data leaks. With your financial information, scammers can steal your identity, file false returns, and more. We discussed which scams to be on the lookout for, as well as which methods of communication the IRS will (and will not) use to contact you. Whether you keep physical copies of your records, digital copies, or both–we provided a timeline for how long you should hold onto these documents, when to destroy them, and how. For those with small businesses, we gave a brief overview of how data leaks can affect your business, along with a few specific tips for keeping your customers and employees safe. Finally, we discussed the importance of having a contingency plan–in the event that your sensitive information is compromised–and what this contingency plan might entail. As we head deeper into tax season, it’s more important than ever to make sure your information is protected. Therefore, we highly recommend giving our last article a quick read! 
 
Speaking of tax season, today’s article is entirely dedicated to making sure you’re adequately equipped to enjoy a painless, easy tax season. For some, tax season is associated with feelings of stress and anxiety. This may be due to fears about not having sufficiently withheld enough to pay their taxes, not being able to locate important receipts or documentation, and so much more. We here at Hoods Tax & Accounting want you to know tax season doesn’t have to be stressful. (In fact, it’s our favorite time of the year!) Preparing well in advance does help, but if you’ve neglected to do so, there’s still time. Tax season doesn’t end until April and, even then, you can apply for an extension. The important thing is you begin the vital process of collecting documents, securing your information, and making the right decisions for your financial health. In today’s article, we’ll provide you with a comprehensive checklist of tasks, each of which will put you in a better position to rock tax season. If you’re interested, keep reading! 
 
Keep Track of Important Dates
 
Just as we mark the calendar to remember birthdays and anniversaries, it’s helpful to add important tax dates to our calendar as well, as this can give us perspective. Unofficially, tax season starts at the beginning of the year and ends around April 15th. However, the IRS can sometimes delay the official start of tax season for a few weeks, in order to prepare. For example, the IRS did not begin accepting 2020 tax returns until February 12th, 2021. This year, you might be able to submit your 2021 returns a bit earlier, beginning between January 24th and January 31st. (These are estimated dates.) If you want to be efficient, you can base your tax filing plan around the beginning of February. 
 
Now, the end of tax season, which would ordinarily fall on April 15th, has been pushed to April 18th. Why? Simply put, Washington D.C. observes Emancipation Day each year on April 16th. When this holiday falls on a Saturday, it’s observed the Friday before. When this holiday falls on a Sunday, it’s observed the following Monday. Since April 16th is on a Saturday, it will be observed on Friday, April 15th and the IRS (along with other government agencies) will close. If you request an automatic extension, you’ll have another six months to file your tax return. 
 
It’s important to estimate when you’ll receive your refund, too. The IRS has a ‘Where’s My Refund’ function on their website, which allows filers access to the status of their refund. You can anticipate at least two or three weeks before you receive your refund. For those who have the Earned Income Tax Credit or Child Tax Credit, your return can take up to a month longer, as the IRS vets your eligibility. If you file during peak filing season (i.e. mid to late-March), then your refund may be a bit delayed. As well, if you filed by paper, then your return can take three to four weeks just to process. You’ll need to factor this into your estimated waiting period. 
 
Gather Your Records
 
Gathering your receipts and records can be particularly stress-inducing. Instead of scrambling to find disparate documents, fretting whether you threw something important away, and otherwise giving yourself a headache–slow down. Make a list of the documents you know you’ll need, in order of priority. The IRS recommends you have the following documents prior to filing: 

• Forms W-2 from your employer(s)
• Forms 1099 from banks, issuing agencies, and other payers including unemployment compensation, dividends, distributions from a pension, annuity, or retirement plan
• Form 1099-K, 1099-MISC, W-2, or other income statement if you worked in the gig economy
• Form 1099-INT if you were paid interest
• Other income documents and records of virtual currency transactions
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage
• Letter 6419, 2021 Total Advance Child Tax Credit Payments to reconcile your advance Child Tax Credit payments
• Letter 6475, Your 2021 Economic Impact Payment, to determine whether you're eligible to claim the Recovery Rebate Credit

If you received Advance Child Tax Credit payments in 2021, the Letter 6419 will state exactly how much you received. If you’re eligible to receive more, you can claim the remaining credit on your return. If you received too much, you’ll need to prepare to compensate for the excess amount.
Calculate Your Withholding
 
Of course, if you’re withholding your own taxes, it’s advisable you calculate your withholding quarterly to avoid coming up short when tax season rolls around. After all–it’s better to have more than you need than to not have enough, right? The IRS provides a tax withholding estimator. Essentially, you can input the amount you (or you and your spouse) earn, to estimate how much money should be withheld from each paycheck. Even if your employer withholds federal income tax from your check already, this estimator can help you reassess whether too much or too little is currently being withheld. (Note: The Tax Withholding Estimator is currently under maintenance and will not be available for use until late January. There are other tax withholding estimators online, but be sure not to share any sensitive information, such as your social security number, name, or address.) 
 
Find a Tax Professional
 
Even if you plan to file your taxes yourself, having a licensed tax professional on-hand doesn’t hurt. If you have questions, it’s better not to guess, as even minor mistakes on your tax return can result in delayed refunds and contact from the IRS. If you plan to choose an itemized deduction rather than the standard, a tax professional can help you to determine which deductions you’re actually eligible for. It’s important to choose a tax preparer who is experienced, licensed (or certified), and is familiar with special tax provisions in your state. 
 
Tax season can either be a hassle or a gift, depending on how you handle the moving parts. We hope we’ve shed light on a few simple ways you can cut down on unnecessary stress. As always, we’re here to help! Hoods has been facilitating peaceful tax seasons since 1988 and we don’t plan to stop anytime soon. At Hoods, we offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Thank you for taking the time to read and we hope you’ll return for future learning! Until next time!

​Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! As we approach the end of the year, tax season steadily approaches. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!
 
In honor of the holiday season, our last article was dedicated to explaining everything you need to know about the gift tax! We took a little trip down memory lane to discover when the gift tax was first implemented and how it has evolved in the century since. We also explained the key differences between the gift tax and the estate tax, as well as how these types of taxes influence the distribution of personal wealth. Did you know there’s a yearly gift tax exclusion, which allows you to give away a certain amount of value without having to pay taxes? Did you know there’s also a lifetime gift tax exclusion, which caps the amount a single individual can give tax-free throughout the course of their life? Don’t worry–we covered both! The yearly gift tax exclusion is subject to change, but we disclosed the amount for 2021, which will apply this tax season! And, to make sure all of our bases were covered, we also detailed exactly how to file a gift tax return. To learn everything you need to know about the gift tax, you should definitely check out our last article! 
 
As more of our personal records migrate online, protecting our sensitive information isn’t as easy as shredding a few documents. With data leaks, cyber-hacking, and scams altering people’s lives every day, we must each make a concerted effort to protect ourselves. Old tax records present an opportunity for others to steal your identity or gain access to further financial information. Today, we’ll be sharing a few tips for keeping your information safe. You can use this article as a point of reference for your own security strategies, whether you file taxes for your family or own a small business. CPAs deal with other people’s sensitive information daily and are held to a higher standard than most when it comes to security. For this reason, we’re well-versed in how to store, dispose, and secure personal documents. As we offer our tips, you might check these off of your Security 101 Checklist! 
 
Why is securing your tax records important? 
 
According to a study performed by Accenture, about sixty percent of small businesses that experienced a data breach or a cyber-attack went out of business within six months. Scammers can use the information gleaned during these attacks to file fraudulent business returns, receive business credits, and more. Further, even if the business survives, such breaches can damage the trust their customers have placed in their services. On a personal level, tax scams racked up about $1.3 billion in 2019, even though the FBI Internet Crime Complaint Center estimated only 15% of crimes were reported. Tax scammers will often pose as IRS employees or members of fake charities. They are looking to obtain personal information which can be used to commit fraud or gain access to your personal finances. 
 
There are two states during which a tax record must be protected. The first state is physical and the second state is digital. The IRS recommends holding on to your tax returns for a minimum of three years (along with other documents, like W2s, 1099s, and deduction-related receipts). This three-year period begins when you file the return, when your taxes were due, or when you paid your taxes, depending on whichever date is latest. You should keep your records twice as long if you intentionally underreport your income or report a capital loss from securities. These documents might be requested as part of an audit or to reassess a refund. Therefore, it’s important to keep your records instead of just tossing them as soon as tax season is over. But how do you keep these documents safe for years on end?
 
If your tax records are physical, then the most important consideration is where you’ll keep them. The IRS recommends keeping your paper records under lock and key, like a desk drawer in your home office. You should, of course, never toss paper returns (or supporting documents) into the trash intact. You should always shred old financial or health records, especially if they contain sensitive information (such as your income, health status, SSN, etc.). 
 
If your tax records are digital, then there are several considerations you’ll need to take into account. First, what will you do if your hard drive crashes? Short of any external factor, all electronics are subject to fail at some point. For this reason, it’s important to keep your records backed up on an external hard drive, which you can store in the same manner as important paper documents. You might also invest in encryption software, especially if these records are for your business. If you’re getting rid of an old computer, on which you’ve stored your records at some point, be sure to wipe the entire hard drive. Simply deleting these files will not ensure they’re completely gone. You should wipe portable devices, too, such as phones and tablets.
 
Other Security Measures
 
Certain viruses specifically target sensitive information. As you’re exploring the internet, you might not even be aware you’ve clicked on a virus. For this reason, it’s important to invest in anti-virus software, as well as firewalls. Anti-virus software will alert you to the presence of a virus, while firewalls can act as extra protection between cyber-threats and your information. Concerning phishing scams, you’ll need to learn to recognize suspicious correspondence. The IRS does not “initiate contact with taxpayers by email, text message or social media channels to request personal or financial information.” No matter how professional an e-mail or text message sounds, if this is the first time you’re hearing about an “issue” with your taxes, it probably isn’t the IRS. Further, the IRS will only direct you to share personal information through a secure channel, such as their website or a portal run by an approved affiliate. 
 
How do you spot fake charities reaching out for “donations”? If you receive a phone call requesting a donation, do not feel pressured to give right then and there. Instead, do research on the charity in question. A cursory search on Google can reveal when the charity was founded, what work the charity has done, and whether others have been scammed by the “charity” in the past. When you’re using your electronics in public, try to use a personal hotspot or a WiFi network protected by a strong password, as hackers can use WiFi to obtain your personal information. 
 
OIC Mills are what the IRS calls promoters who claim their services are needed to “resolve tax debt through the Offer in Compromise (OIC) program.” These promoters will often claim there is a dwindling amount of time during which debtors can settle their debts for “pennies-on-dollar.” This is a scheme and you should hand up the phone immediately. If someone calls saying they are able to “cancel” or “suspend” your social security number, this is also a scam and you should ignore them. 
 
Plan for the Worst
 
What if you follow these Security 101 tips and are still the victim of identity theft? Or, your tax records were stolen? Well, then you should have a contingency plan. In the event your personal information is compromised and you believe you’ve been the victim of a scam, you should contact the requisite agencies. This might include your bank (to cancel your cards and alert them to suspicious activity), the IRS (to discover if anything has been filed in your or your business’s name), and whoever else might need to be alerted. Having a plan already in place allows you to respond quickly to any incident. As well, you can rest easy knowing that–should the worst happen–you’re prepared. 
 
 
We hope this has been helpful! Preparation is always better than dealing with the fallout. That’s why, if you haven’t already, take today to implement a few of these tips. Keeping your personal and business records protected will mean you’re less likely to become the victim of an attack, hack, or scam. We’re almost to tax season and it’s more important than ever to keep your information safe! At Hoods, we offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Thank you for taking the time to read and we hope you’ll return for future learning! Until next time!

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! As we approach the end of the year, tax season steadily approaches. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!
 
Our last article was a culmination of our Basics of accounting series. In part one, we discussed why accounting is a primary function in the management of a business of any size. We detailed what exactly accountants are responsible for, as well as how they execute these responsibilities. Like bookkeeping, accounting is separated into distinct types. We provided an overview of the differences between these types and how to determine which type is suitable for your business. In addition to answering a few common questions about accounting, we shone a light on the benefits of hiring a professional accountant. In part two, we started parsing through the nitty-gritty details of accounting principles. Accounting principles are the general guidelines by which accountants perform their duties; and each principle is underpinned by a practicality. While the most commonly recognized accounting principle is the accrual principle, in part two of this series we covered the consistency principle, the full disclosure principle, the conservatism principle, and more. In part three, we continued our discussion on accounting principles, then finished out the series by answering a couple of questions and providing a few best practices for accurate accounting. The aim of the Basics of Accounting series was to provide a solid foundation for understanding how accounting works and to stimulate an interest in further learning. If you haven’t already, make sure to give this series a read! 
 
Today, in honor of the season of giving, we’d like to provide you with a comprehensive explanation of gift taxes. Many aren’t aware gift taxes exist and, if you’ve never heard of them before, don’t worry. There’s no tax on a majority of gifts you’ll be giving this holiday season. In fact, the gift tax only applies to gifts of a certain value, and this value is determined by the IRS. In our discussion of the gift tax, we’d like to give you a basis for why such a tax exists by exploring its formation and history. As well, we’ll make sure you know how to pay your requisite dues whenever you give a gift to someone (or someone gives a gift to you)! 
 
The History of the Gift Tax
 
First, let’s define what a gift is. While this may seem obvious, the definition according to the IRS is the one we’ll be referring to today. According to the Internal Revenue Service, a gift is “any transfer to an individual, either directly or indirectly, where full compensation (measured in money or money’s worth) is not received in return.” Now, a taxable gift can come in the form of cash, stocks, real estate, or intangible property (such as intellectual property, trademarks, patents, or copyrights), and is considered “completely gratuitous” when there is nothing of value exchanged. Gift can also be “gratuitous in part,” and this occurs when some amount of value is exchanged, but not the full amount given. In this case, the difference between the amount given and the amount received is the gift. 
 
The gift tax wasn’t even a thing until 1924, when—in response to people attempting to escape paying their taxes—the IRS cracked down. Even then, the tax was repealed in 1926. Four years later, in 1932, the entire idea was overhauled and reintroduced. The manner by which the gift tax disallows individuals to escape paying their taxes is difficult to grasp unless you first understand the estate tax. The estate tax has seen much debate in the decades since its inception. Essentially, your estate is the combined value of all of your assets. When you die, before these assets are bequeathed to your heirs, they are taxed a percentage. Now, imagine you have $100 million dollars. Instead of assigning this amount to your heirs in your will and having to pay a chuck to the IRS, you once might’ve been able to gift portions of your estate to those of your choosing while still alive and—in this way—circumvent the estate tax. Just as you wouldn’t be taxed for gifting your money, the recipients wouldn’t have to pay income taxes either. That is, until the invention of the gift tax. 
 
At first, the gift tax was only implemented as a means of minimizing estate and income tax avoidance. Soon enough, however, it became clear the gift tax could be used to raise revenue (with $4.6 billion being garnered by the gift tax in 1999 alone). The gift tax still exists today. Why haven’t you ever had to pay the gift tax? Well, the gift tax has an exemption, which we’ll discuss in the next part. 
 
The Gift Tax as of 2021
 
Most people never have to worry about paying the gift tax because the annual exclusion amount is around $15,000. This means that you can gift up to $15,000 in value to as many people as you want and you won’t have to file a gift tax return. Now, in an individual’s lifetime, the exclusion amount is $11.7 million, which means you can give up to $11.7 million over the course of your life without paying gift tax. If you exceed the exclusion amount, you’ll still only owe taxes on the amount over $15,000. For example, if you gave $30,000 to seven friends this year, you would owe gift taxes on $105,000 (which is thirty-thousand dollars minus fifteen-thousand dollars times seven). 
 
This might be frightening upon first glance and make you fearful of accepting large gifts, but there’s no reason to worry. The gift tax is paid by the gifter, not the recipient. As well, certain gifts are not considered taxable at all. The gift evidenced in the example above is one, and that is considered a “present interest gift,” which means the gift can be enjoyed as soon as it’s received. Then there are charitable gifts, such as those you might make to a non-profit organization. Then there are gifts made to a spouse who is a U.S. citizen. Finally, there are gifts which are for educational expenses. These educational gifts are defined quite narrowly, in that only payments made directly to educational institutions for the purpose of tuition qualify. 
 
Outright cash isn’t the only type of gift recognized by the IRS, which is where some people find themselves tripped up. If you cancel someone’s debt, this is considered a gift. If this gift exceeds the annual exclusion, you’ll need to pay the gift tax. Likewise if you make payments which are owed by someone else. There are several other instances where you might have to pay the IRS for a transaction which they consider to be a gift. Keep in mind, gifts to minors are not exempt from the gift tax. 
 
Advantages and Disadvantages
 
Now, regardless of the advantages or disadvantages of paying the gift tax, it’s required by law. Therefore, you should never attempt to find a way “around” paying the gift tax (no matter what articles you may read encouraging doing so). Using the gift tax to break up your estate can result in reduced estate tax, which is a concern for those with millions of dollars to lose upon their death. There is a tax basis, as well, which can lower the amount of income taxes paid on a piece of property which has appreciated over one person’s lifetime. However, exercising the gift tax will mean lessening your net worth. 
 
How to File
 
To file your gift taxes, you’ll need to file a Form 709: U.S. Gift (and Generation-Skipping Transfer) tax return. You’ll only file this if you exceed the annual exclusion amount for said tax year. 
 
 
We hope you’ve enjoyed learning about the gift tax! As we approach the next tax season, consider Hoods for your accounting needs! We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Thank you for taking the time to read our Basics of Accounting series and we hope you’ll return for future learning! Until next time!

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! As we approach the end of the year, tax season steadily approaches. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!
 
Our last series, Bookkeeping Basics, explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series broke down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions and more can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into our Accounting series. 
 
Now, in part one, we discussed why accounting is a primary function in the management of a business of any size. We detailed what exactly accountants are responsible for, as well as how they execute these responsibilities. Like bookkeeping, accounting is separated into distinct types. We provided an overview of the differences between these types of accounting and how to determine which type is suitable for your business. In addition to answering a few common questions about accounting, we shone a light on the benefits of hiring a professional accountant. In part two, we started parsing through the nitty-gritty details of accounting principles. Accounting principles are the general guidelines by which accountants perform their duties; and each principle is underpinned by a practicality. While the most commonly recognized accounting principle is the accrual principle, in our last article we covered the consistency principle, the full disclosure principle, the conservatism principle, and more. Today, we’ll continue our discussion on accounting principles and finish out this series by answering a couple of questions and providing a few best practices for accurate accounting. The aim of this series is to provide a solid foundation for understanding how accounting works and to stimulate an interest in further learning. If you haven’t already, make sure to give the first two parts of this series a read! Without further ado, let’s learn!
 
Accounting Principles
 
Who decides on accounting principles? The Financial Accounting Standards Board, otherwise known as the FASB, dictates the standard accounting principles used by accountants in the United States. These principles are called the “generally accepted accounting principles,” or GAAP. Accounting principles aren’t arbitrary, nor did they arise out of thin air. Rather, as the name suggests, these principles were previously followed by the general majority of accountants and, after a number of years, became a matter of practice. Now, all publicly traded companies must abide by the GAAP. For small businesses, however, most principles are not mandated. In fact, many accountants rely on their own training, experience, and the specific needs of the business they’re servicing to determine which accounting principles to apply. That said, as we established in the last part of this series, consistency is key. Accounting principles should be maintained over long periods to ensure the clearest picture of a company’s financial history can be obtained by looking at financial reports. 
 
The first principle we’ll discuss today is the materiality principle. This is quite a vague, hard-to-pin down concept, as its effect is based almost entirely on perception. Simply put, the materiality principle stipulates that any transaction which might alter the decisions of those interpreting financial statements must be recorded on said financial statements. Conversely, any transaction which is deemed inconsequential or “immaterial,” can be left off of financial statements, as long as this would not result in anyone being misled. Now, determining whether a transaction is material or immaterial is a subjective task, relying on the judgement of the accountant. Failing to record a significant, material transaction can have consequences. Therefore, the Securities and Exchange Commission provides a tentative definition for materiality: “an item representing at least 5% of total assets should be separately disclosed in the balance sheet.” Still, smaller transactions may still be considered significant. For example, if Company A failed to report a loss of $30, would this be considered misleading? Well, if this $30 loss resulted in their reported net profit actually being a net loss, then yes. Therefore, it’s not necessarily about the size of the transaction, but rather the weight of the transaction. If you’re abiding by the materiality principle, be sure to ask yourself: What impact does this transaction have on the overall positive or negative implications of the financial statement?
 
The second principle we’ll discuss is the monetary unit principle. This principle is based upon the assumption that business should record only those transactions linked to a set value of currency. For example, if Company B invested $5,000 into a new piece of equipment, this would be recorded as such. However, if Company B invested time and resources into improving an aspect of their business, this wouldn’t necessarily be recorded. The purpose of the monetary unit principle is to avoid overvaluing certain assets and liabilities. The monetary unit principle plays into a much larger principle—that of verifiability. To be verifiable, accounting results must be reproducible, meaning an outside accountant could derive the same results from using the same historical data. Speaking of historical data, this is the basis for the reliability principle, which states all recorded transactions should be capable of being proven. This is why accountants and bookkeepers alike are always encouraging you to keep receipts! The reliability principle dictates the practice of auditing. To successfully survive an audit, you must have evidence to support transactions. 
 
The revenue recognition principle is one of the most important principles, as a failure to accurately report revenue can land you and your business in hot water. This principle stipulates revenue must be recorded when it is “earned.” Now, this principle becomes complicated by factors such as a company’s size, location, and public or private status. However, in a broad sense, revenue is earned when a company has fulfilled its performance obligations. For example, if Company C has entered into an agreement with Company B to provide a service, the revenue from this agreement will only be earned when the service has been completed, not when the cash is exchanged. As you might’ve already noticed, this principle does not apply to those who practice cash-basis accounting. Financial institutions are releasing more and more regulations concerning revenue recognition in order to standardize the process and provide investors with greater transparency into a company's financial performance. 
 
Finally, there’s the time period principle, which is based upon the assumption that a business should report their financial transactions over a set period of time (i.e. fiscal quarter, fiscal year, etc.). Reporting in this way is essential for trend analysis. 
 
Questions & Best Practices
 
When were accounting principles first standardized? In the 15th century, with the advent of the T-ledger, double-entry bookkeeping became the first standardized accounting principle. More recently, the American Institute of Certified Public Accountants made efforts to standardize accounting in the U.S. Should you try to follow as many accounting principles as possible? No, this isn’t recommended, especially since a few accounting principles are directly opposed to one another. One of the biggest critiques of the GAAP is that it is not mandated, but this gives companies quite a bit of leeway to decide for themselves the best accounting methods. We recommend consulting with professional accountants and asking for their opinion on which accounting principles are applicable for your business. 
 
Like bookkeeping, it’s important to track all expenses and keep evidence of every transaction. If you’re performing your accounting yourself, you’ll need to regularly set aside time to perform necessary duties. Professional accountants make an effort to automate accounting functions where possible. Always keep business finances separate from personal finances, for tax purposes and overall clarity. As well, make sure to keep backups of all financial records. 
 
 
As you can see, accounting is a complex art, dictated by its own set of standards. A professional accountant will be able to navigate these choppy waters with ease and provide you with the results you desire. Consider Hoods for your accounting needs! We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Thank you for taking the time to read our Basics of Accounting series and we hope you’ll return for future learning! Until next time!

​Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation!
 
We recently wrapped up a three-part series on Bookkeeping Basics, which explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series breaks down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into our Accounting series. 
 
Today, we’re continuing our exploration of the art of accounting. In part one, we discussed why accounting is an essential function of managing a business of any size. We detailed what exactly accountants are responsible for, as well as how they execute these responsibilities. Like bookkeeping, accounting is separated into distinct types. We provided an overview of the differences between these types of accounting and how to determine which type is suitable for your business. In addition to answering a few common questions about accounting, we shone a light on the benefits of hiring a professional accountant. If you’re interested in learning the basics of accounting, definitely check out our last article!
 
Today, we’re expanding our understanding of accounting by breaking down the principles which guide the practice. Accounting uses precise data and formulas to assess the financial health of a business. Like any mathematical endeavor, there are hand-and-fast rules to accounting. Professional accountants spend years in specialized degree programs and certifications to learn how to perform these calculations correctly. Today, we hope to impart a few of the overarching principles which govern accounting and give you a sense of confidence in your accounting skills. 
 
Accounting Principles
 
The accrual principle is actually one we’ve discussed before. If you read part one, you already know the difference between accrual accounting and cash-basis accounting. Well, as you might guess, accrual accounting is backed by the accrual principle. This principle is based upon the assumption that transactions will be recorded in the accounting period when they are incurred, not when the cash associated with the transaction actually exchanges hands. For example, if Company A agrees to produce $3,000 worth of products for Company B, this transaction would be recorded immediately, not when the products are delivered or when the invoice for the products is paid. Make sense? This principle assumes reporting transactions immediately is more accurate. The IRS requires most businesses to perform accounting according to this principle because they also believe this method is more accurate. 
 
The supporting principle to accrual accounting is the matching principle. The matching principle relies upon the assumption revenue should be recorded alongside corresponding expenses. For example, if Company A sold 32 units of product, in addition to recording revenue, they would also record a deduction in inventory. You might find the matching principle familiar and, if you remember our breakdown of double-entry bookkeeping in our Bookkeeping Basics series, then you would be right! The matching principle is the basis for double-entry and is not used for other types of bookkeeping, such as cash-basis. 
 
The conservatism principle is similar to the accrual principle in that, with this method, you record expenses and liabilities as soon as they occur. However, the conservatism principle differs from the accrual principle in that, with this method, you would wait to record revenues and assets until you are sure they will occur. For example, using the previous example, Company A would not record the $3,000 worth of revenue until Company B paid the invoice, but they would record the expenses accrue in producing $3,000 worth of products. This principle is considered conservative as profits are routinely understated on financial statements. While you never want to overstate profits, understating profits can lead outside entities or investors to incorrectly assess your company as underperforming. The advantages of such a principle are a better projected financial future, as profits are pushed to later dates. 
 
The consistency principle isn’t as much a method for the recording of business’s financial performance, but rather a fundamental building block for multi-year accuracy when evaluating a business’s financial performance. This principle assumes you should maintain a single accounting method for as long as possible. Frequently jumping between different methods of accounting can make it difficult to assess the long-term growth or decline of a business. Following the consistency principle means you’ll only switch to another accounting method if, and only if, a better method comes along. 
 
The cost principle assumes businesses should record assets, liabilities, and equity investment at the price they paid to purchase. The advantages of aligning yourself with the cost principle are a simplified entry of financial data and the figures entered are verifiable. However, the disadvantages of the cost principle are its lack of accuracy. The cost principle assumes the value of assets remains the same as when you first purchase them and, if you’ve ever bought a car, you know the value of an asset can depreciate over time. Likewise, assets can appreciate over time, too. For example, if Company A invested $5,000 in Company B in 1999 and, by 2021, Company B increased its worth by 20%, this investment would have increased by $1,000. However, with the cost principle, the accounting for Company A will not take this increase into account. As you can see, this would result in skewed figures for both assets and liabilities. More and more, businesses are moving away from the cost principle, in favor of adjusting initial purchases prices to their fair values periodically. 
 
Now the going concern principle is the answer to the cost principle. The going concern principle assumes a business will continue to operate and, thus, can reasonably forestall the acknowledgment of certain expenses like depreciation. These expenses will have to be accounted for eventually, but the going concern principle offers a bit of leeway for business owners. 
 
The economic entity principle could be considered a basic business doctrine. This principle is the basis for keeping business and personal transactions separate. For tax purposes, mixing the assets and liabilities of two or more businesses is unadvised. Financial statements should reflect the independent financial state of a single business entity. In the event of an audit, messy records can lead to problems. Even a single business with multiple divisions might benefit from keeping records of expenses and revenue separate. 
 
The full disclosure principle, as you might assume, puts forth the idea it’s the responsibility of a business to provide context for financial statements where necessary. Any information which might affect how a recipient may interpret the contents of financial statements should be accompanied by clarification. Examples of full disclosure might include an explanation of a change in accounting principle, an explanation for a non-monetary transaction, or an explanation of a high volume of transactions with a single party. When financial statements are created for management purposes, full disclosure is generally not necessary. The full disclosure principle applies most often when submitting financial statements to entities outside of the business, such as the IRS. 
 
 
If you can believe it, these are only a handful of the accounting principles which govern accounting! We hope we’ve given you an easy-to-understand breakdown of these principles. In the next part of this series, we’ll continue learning about accounting principles. We’ll answer a few more of your most frequently asked questions about accounting, too! Hoods is here to make bookkeeping and accounting approachable. Since both of these practices have the ability to make or break a business, we want to make sure each small business has the very best basis for success! We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

​Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation!
 
We just finished a three-part series on Bookkeeping Basics, which explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series breaks down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into today’s article. 
 
The topic for today is accounting. Many are unsure of the difference between bookkeeping and accounting. To be sure, there’s plenty of overlap between the two professions and many small business owners find themselves donning the hats of both accountant and bookkeeper. However, there is a notable difference between the two. Bookkeeping, on the one hand, deals with compiling raw data. Transactions must be recorded into the proper accounts and underlying subtypes. These entries must be entered accurately to ensure the financial statements derived from the data truly reflect the health of the business. Bookkeeping must be done regularly (i.e. weekly or monthly), as businesses continue to accrue transactions. Accounting, on the other hand, uses the financial information yielded from bookkeeping to plan and file taxes, as well as give advice to improve the health of the business. Both bookkeeping and accounting are fine financial arts. We hope to give you the information you need to understand the purpose of both and determine whether to invest in a bookkeeper or accountant for your business’ needs. If you’re interested in learning more about the basics of accounting and how proper accounting can increase the growth of your business, read on! 
 
Why is accounting important?
 
It’s important to keep track of expenses, right? Would you say it’s also important to pay back outstanding debts? A company’s liabilities, revenues, and equity all play an equal role in determining how well a company is performing and where changes should be made to improve performance. If you agree it’s necessary to understand the unique demands on a company’s cash flow, as well as the federal and state obligations concerning a company’s taxes, then you agree accounting is a vital aspect of any company’s organizational structure. 
 
From the bottom upwards, accounting uses business transactions to assist management in developing expectations for the future of the company and adjust their strategy accordingly. For example, accounting can be as simple as an employee retaining receipts from a business trip and these receipts being written off come tax season. Accounting could be utilizing quarterly revenue statements to estimate yearly tax payments and setting aside this money preemptively. Accounting could also be the complex process of using financial statements to plan hiring patterns for the next year and to draw investors.
 
Accountants are responsible for a host of business necessities, from filing financial statements with authorities such as the Internal Revenue Service or the stock exchange, to creating budgets which allow for full operations while maximizing profitability. You might think of accountants as doctors, attempting to diagnose the illnesses of companies and recommending lifestyle choices which will help companies achieve optimal health. 
 
Types of Accounting
 
Just as bookkeeping is divided into distinct types—single-entry and double-entry—accounting is similarly divided. The first type of accounting is cash accounting. This is the simplest method, as only cash transactions made by the employees of a business are recorded. This can include a number of business expenses, including transportation, lodgings, and food. The basis of these records are receipts retained by employees. This can also include expenses paid for with cash, such as supplies and equipment. Also known as cash-basis accounting, this method records payments and expenses when the cash exchanges hands (i.e. bill paid, product bought). This type of accounting is, of course, better used by cash-heavy businesses. This type of accounting would not work well for large corporations with complex financial structures, as this type of accounting would fail to show the true position of the company’s accrued liabilities. 
 
For this reason, accrual accounting is the method often used by bigger businesses. While accrual accounting does record cash transactions, this type also takes into account credits, debits, and other forms of transactions. This can include money owed by customers on store credit or money owed to customers on store credit. Essentially, regardless of whether a cash transaction occurs or not, a transaction can still be recorded in the corresponding accounts with accrual accounting. 
 
Corporations (or any business with over $25 million in gross revenue) are forbidden from using anything other than accrual accounting. However, small businesses have a choice between accrual accounting and cash-basis accounting. How do you decide? The method of accounting you choose has everything to do with time. When do you want your books to reflect a transaction? If you choose to follow the cash-basis accounting method, your books will reflect a payment or expense when the payment or expense is fulfilled. For example, if your business makes a sale on the 13th of November but the invoice isn’t paid until the 12th of December, the transaction will not be recorded until the 12th. If you choose to follow the accrual accounting method, however, your books will reflect a payment or expense as soon as the transaction occurs. Accrual accounting is considered more accurate because you can plan for incoming and outgoing cash flow. Cash-basis accounting will give you an accurate reflection of what’s currently in your accounts, but may struggle to reflect the full picture. That said, cash-basis is often less complicated to learn.
 
As well, it’s important to note, with cash-basis accounting certain expenses and revenue may not be recorded until the following year. For example, an expense incurred in late 2021 but not paid until early 2022, could not be deducted from a businesses 2021 tax return. The same is true for revenue. Consider the tax implications of whichever type of accounting you choose. 
 
Should I hire a professional accountant?
 
There is a certain diligence and attention-to-detail required to perform accurate accounting. As well, accountants are held to a set of widely accepted standards, including (but not limited to) the generally accepted accounting principles (GAAP) and the rules of the Financial Accounting Standards Board. Accountants are privy to a long set of principles which govern their recordkeeping, financial reporting, and advice. We’ll cover a number of these principles in later parts of this series, but many accountants train for years to understand the complex inner workings of businesses, both big and small. Many new entrepreneurs and business owners can benefit from the expertise of a seasoned accountant, even if they believe they are equipped with the mathematical skills to perform their accounting duties themselves. Of course, you must make the best decision for your business, but investing in an experienced accountant is almost never a bad decision.
 
 
You’ve made it to the end of the first part of our Basics of Accounting series! Thank you for taking the time to read about cash-basis and accrual accounting, as understanding the difference between these two types is the first step to understanding accounting. In the next part of this series, we’ll cover the financial principles which govern accounting. We’ll also delve into the tax responsibilities of accountants, as well as a few best accounting practices for small businesses. The health and sustainability of your business is the foremost concern of any good accountant. That’s why our highly-trained accountants at Hoods Tax & Accounting take ample time to study the structure of your business and learn your unique goals. We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting—giving you the tools you need to meet your short and long term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our second to last post and the first installment of this ‘Bookkeeping Basics’ series introduced the concept of what bookkeeping is, what it's used for, why it’s important and how to begin. From the old “general ledgers,” which used red and black ink, to ultra-modern digital programs, understanding the basics of bookkeeping is an essential part of running any successful small business. As a precursor for accounting, bookkeeping provides an accurate basis for evaluating the health of your business and planning for financial growth. For these reasons, accurate bookkeeping is paramount. 
 
The first part of this series explained the difference between single-entry and double-entry bookkeeping methods. As well, we went through the various types of accounts (i.e. assets, liabilities, revenues, and expenses), as well as their underlying subtypes (e.x. accounts receivable, utilities expense, interest income, etc.). We gave you a few options as far as setting up your accounts (e.g. Excel spreadsheet vs. digital bookkeeping software) along with their corresponding pros and cons. We explained the difference between a debit (Dr) and a credit (Cr) and trust us, it’s not what you think. Finally, we gave a few best practices tips concerning bookkeeping to keep your books organized and accurate. Therefore, it’s in your best interest to read our first article (if you haven’t already) before delving into this second part!
 
In the second part of this series, we continued our exploration into the world of bookkeeping. We discussed balancing books, preparing financial reports, and a few more best bookkeeping practices. How do you know when you’ve reached the adjusted trial balance? What’s the equation for determining your books are balanced? What’s the difference between a P&L statement and a cash flow sheet? And, how often should you be setting aside time to bookkeep? We answer all of these questions and more in our last article. We highly encourage you to go check out Part II! 
 
Today, we come upon the final installment in our Bookkeeping Basics series. Our aim is to answer the most commonly asked bookkeeping questions. You should leave this series feeling confident in your understanding of bookkeeping principles and ready to pursue bookkeeping yourself (or invest in an experienced professional). If you reach the end of the article and still have questions, reach out to us! Now, without further ado, here’s Part III!
 
Is cash-basis accounting the same as single-entry bookkeeping?
 
Technically, yes. Cash-basis accounting includes recording a single entry for every transaction which includes the making or receiving of a payment. If you read Part I, you’ll recognize this definition as single-entry bookkeeping. This type of bookkeeping is preferable for small-scale businesses with straightforward transactions (i.e. I make the product and you buy the product). Double-entry bookkeeping, in a similar manner, also goes by the name accrual accounting. Accrual accounting includes recording two entries for every transaction even if the transaction does not include making or receiving a payment. This type of bookkeeping is preferable for larger, more complex businesses with multiple forms of transactions (i.e. I make various products and offer store credit and sell products from other businesses.) 
 
Is there a difference between bookkeeping and accounting? Do I need to hire a bookkeeper in addition to an accountant? 
 
There is certainly a difference between accounting and bookkeeping—and a distinct difference at that. Bookkeepers manage the ever-evolving ledgers of their clients. As transactions accrue, further data must be integrated into the bookkeeping system. Bookkeepers must categorize revenue and expenses, generate financial statements, reconcile discrepancies and continuously review the ledger for accuracy. A bookkeeper’s job is never done, and accounting is actually an extension of bookkeeping. Accountants use the financial data and statements generated by bookkeepers to prepare income tax returns and give tax planning advice. This doesn’t mean an accountant and a bookkeeper cannot be the same person. Many small businesses operate with a single individual fulfilling both positions. However, the obligations of each should not be conflated and, should you choose to outsource, you may have to hire both an accountant and a bookkeeper. 
 
(Keep in mind: Hoods Tax & Accounting offers both bookkeeping and accounting services!)
 
I’m still confused about the difference between debits and credits. How do I know which to put in my books? 
 
Simply put, debits and credits are inversely related. This means each debit corresponds to an equal credit and vice versa. In this way, the books remain balanced. Which means you’ll always put both. Remember: the equation which dictates a balanced ledger is Liabilities + Equity = Assets. Which means if any aspect of this equation changes, the other aspects must change as a result. As a rule of thumb, debits increase asset and expense accounts, while decreasing liability, equity, and revenue accounts. While credits increase liability, equity, and revenue accounts, while decreasing asset and expense accounts. Notice how they mirror each other? 
 
What’s the difference between accounts payable and account receivable? 
 
This distinction will only apply if you use a double-entry, or accrual, bookkeeping system. Accounts payable is, as the name suggests, money which needs to be paid. Or, in other words, a liability. This might be an expense purchased on business credit, which will need to be paid off later (and potentially with interest). Accounts receivable, therefore, is money which needs to be paid to your business. Or, in other words, an asset. This might be a customer purchase made on credit, which they will need to pay off later (and potentially with interest). Both accounts payable and accounts receivable are accounts which you can and should record transactions within. 
 
Why should I invest in a professional bookkeeper? Isn’t it cheaper to simply do the bookkeeping myself? 
 
Do you remember eighth grade math? Do you remember “showing your work,” going through all of the right steps, and still arriving at the wrong answer? Bookkeeping can be a bit like eighth grade math sometimes. The purpose of these articles has been to show you bookkeeping isn’t as complicated as it may initially seem, but that doesn’t mean bookkeeping is easy. Minor mistakes or even procrastination can lead to major confusion. Misplaced entries or inaccurate figures can leave you wondering where money went and wasting precious time trying to find it. No small business owner wants to realize they’ve been doing things wrong when payday comes or tax season rolls around. That’s why you should invest in a professional bookkeeper. Who knows? The investment may end up paying for itself in the long run. 
 
You can hire out to a dedicated bookkeeping and accounting firm (like Hoods) or hire an in-house bookkeeper for your business. If you’re certain you would like to bookkeep for yourself but are hesitant about making beginner mistakes, invest instead in a bookkeeping software. At Hoods, we have QuickBooks ProAdvisors who can train you how to use the software for your businesses bookkeeping needs. 
 
What’s the most common bookkeeping error?
 
There are so many… Primarily, failing to track receipts for minor purchases. We understand, these things can slip the mind, but due diligence ensures you’re able to receive the best return come tax season. More generally, business owners tend to take on too much regarding bookkeeping. As previously discussed, it’s better to avoid mistakes and invest in a professional than do things yourself and make grievous errors. Develop your bookkeeping skills over time by working closely with a professional and, when you feel ready, take on the responsibility. This way you cover your bases and save yourself trouble!
 
Thank you for coming along on this bookkeeping journey with us. Again, our aim was to illuminate the entire bookkeeping process and impress upon you the importance of accurate bookkeeping. Whether you’re off to do your own bookkeeping or investing in a professional, we wish you the best of luck! As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous post and the first installment of this ‘Bookkeeping Basics’ series introduced the concept of what bookkeeping is, what it's used for, why it’s important and how to begin. From the old “general ledgers,” which used red and black ink, to ultra-modern digital programs, understanding the basics of bookkeeping is an essential part of running any successful small business. As a precursor for accounting, bookkeeping provides an accurate basis for evaluating the health of your business and planning for financial growth. For these reasons, accurate bookkeeping is paramount. 
 
The first part of this series explained the difference between single-entry and double-entry bookkeeping methods. As well, we went through the various types of accounts (i.e. assets, liabilities, revenues, and expenses), as well as their underlying subtypes (e.x. accounts receivable, utilities expense, interest income, etc.). We gave you a few options as far as setting up your accounts (e.g. Excel spreadsheet vs. digital bookkeeping software) along with their corresponding pros and cons. We explained the difference between a debit (Dr) and a credit (Cr) and trust us, it’s not what you think. Finally, we have a few best practices tips concerning bookkeeping to keep your books organized and accurate. Therefore, it’s in your best interest to read our last article (if you haven’t already) before delving into this second part! 
 
Today, we’ll continue our exploration into the world of bookkeeping. We’ll discuss balancing your books, preparing financial reports, then give you a few more best bookkeeping practices. When you’re alone at the computer with a bunch of receipts and numbers, figuring out how to make sense of everything can be overwhelming. Our aim is to showcase how simple bookkeeping can be when you understand the fundamentals. If you begin how you aim to finish, you should establish bookkeeping etiquette early on, as this will ensure later success. If you've been bookkeeping in a messy, roundabout way for years and fear how much effort an overhaul will require, take things one step at a time. We’ll be with you every step of the way!
 
Without further ado, let’s jump in!
 
Balancing the Books
 
This is a phrase many of us have heard thrown around throughout our lives, but what does “balancing the books” really mean? The best way to visualize balancing the books is to envision a scale. Not the scale you step on in the bathroom or the scale your doctor uses to weigh you. In this case, envision what’s called a double-pan balance scale. These types of scales allow you to weigh two things in relation to one another. When you place weights on both sides, the heavier of the two weights will sink lower. If the two weights are equal in mass, then both sides of the double-pan balance scale will appear level. Makes sense, right? 
 
In the same way, when you balance your books, the debits and credits recorded throughout a period (e.g. a quarter, a year) should “match” (which is to say they should correspond. In Part I we discussed the double-entry bookkeeping system. In this system, each transaction is recorded twice. First as a debit, or an increase. Secondly, as a credit, or decrease. For example, if Sally’s lawn company spent $3,000 on a new lawn mower, Sally would record a $3,000 debit in the left-hand side of the Equipment account. Then, Sally would record a $3,000 credit in the right-hand side of the Cash account. Both Equipment and Cash are considered asset accounts and, in this case, Sally has traded one type of asset for another type of asset. 
 
Now, these entries are akin to journal entries. They are a record of the transaction. When you balance your books, you are “posting” these entries into the general ledger in order to extrapolate the final account balances. While most bookkeeping programs will do this math for you (and point out errors in your entries at the time you make them), it’s still important you understand what’s being done. 
 
Continuing the example from earlier, Sally has redistributed her wealth between two different forms of assets in the aforementioned transaction. Thus, her Equipment account will reflect the debit, her Cash account will reflect the credit, but her overall Assets will not change because of this transaction. Now, conversely, if over the course of the month Sally not only purchased a new lawn mower but also needed to pay the firm which markets her services $2,000, the cash account balance and the overall assets would need to be adjusted down by $2,000. 
 
Once you’ve adjusted the balance of each account, you’ll have what’s called an adjusted trial balance. Assuming you’ve done everything right, when you add your company’s liabilities to your company’s equity, you’ll arrive at a figure which is equal to your company’s assets. In short:
 
Liabilities + Equity = Assets
 
Now, equity, if you’re unsure, is the value left over when liabilities are deducted from assets. (Psst! We covered equity in Part I.) This makes the equation, more accurately: 
 
Liabilities + (Assets - Liabilities) = Assets 
 
If you arrive at two different numbers, this indicates a discrepancy in your bookkeeping. You’ll need to comb back over your records, comparing debits and credits and making sure everything is indeed balanced. Once you’ve balanced the figures successfully, you’re ready to close the books and begin compiling financial statements!
 
Yay!
 
Preparing Financial Reports
 
This is one of the most exciting parts of bookkeeping, because this is the stage when conclusions can be drawn based off of the meticulous records you’ve kept. With these financial statements, you’ll be able to assess the health of your business and plan accordingly for future expansion or cutbacks. The three essential types of financial statements are: balance sheets, profit and loss “P&L” statements, and cash flow statements. We’ll provide you with a brief overview of each. 
 
Balance sheets are a snapshot of your books. They showcase the equation at work and include your current assets, liabilities, and equity. You’ll include the balances of your accounts here. When someone looks at your company’s balance sheet, they’ll be able to assess in only a moment the health of your company. Are you in the red? Or, do you have cash reserves which will facilitate expansion? 
 
Profit and loss statements, also referred to as income statements, report on revenues and expenses over a period of time. For example, a clothing company may have grossed $1.2 million in a quarter, but spent $600,000 on materials, shipping, and marketing in the same time span. Therefore, the company’s revenue was actually $800,000. By comparing multiple P&L statements, one can glean the growth (or decline) of a company. 
 
Finally, cash flow statements are a simpler version of a P&L. They focus solely on how much money the company is bringing in and sending out. By evaluating a cash flow statement, you can assess a company’s ability to pay its bills and remain afloat. 
 
Best Bookkeeping Practices
 
Sticking to a regular schedule is key to managing your books. Entering records of transactions can be tedious and time-consuming. Allowing too much time to pass between entries only makes the work unbearable when you finally do sit down. Choose a time every week, two weeks, or month, to input financial information (i.e. invoices, bill payments, revenue, etc.). Keep all of this information in one place and be sure to tackle bookkeeping when your mind is well-rested. Minor mistakes can turn into headaches later. 
 
If you’re unsure about handling the entirety of your company’s bookkeeping, there’s no shame in that! Many successful businesses outsource their bookkeeping needs, as this frees up time and mental energy. Just make sure you invest in a trusted professional to handle your bookkeeping! 
 
 
Thank you for reading the second part of the Bookkeeping Basics series! We hope we’ve demystified bookkeeping, at least a bit. Tune in for the third part of the series, where we’ll be answering commonly asked bookkeeping questions! As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous posts delve into the benefits of a 529 savings plan and just what cryptocurrency is. If you’re saving for your education or your child’s education or would like to understand the recent tax provisions concerning cryptocurrency, our latest articles will tell you everything you need to know! 
 
Bookkeeping has come a long way since the “olden days,” when business records were recorded in ledgers. That said, electronic bookkeeping systems still refer to account sheets as “General Ledgers.” Personally, we think bookkeeping would be much cooler if it were still done in red and black ink! When you boil bookkeeping down to its basics, that’s what it’s for: determining whether a business is in the “red” or the “black,” as well as just how far a business is in either debt or profit, respectively. 
 
Bookkeeping is an essential part of any small business. From online-only stores from the living room to full-fledged brick and mortar shops on busy streets—bookkeeping allows businesses to reach their full potential and make informed decisions. Understanding the moving mechanisms of your business on a basic level enables you to assess the overall financial health of your business and improve spending. 
 
So, what is bookkeeping? 
 
Bookkeeping is the precursor to accounting. Bookkeeping is the detailed input of financial data into a system which allows for oversight, review, and analysis. You might feel intimidated by P&Ls, cash flow statements, and balance sheets, but the truth is that bookkeeping is done one transaction at a time. It doesn’t have to be complicated, which is why today we’re taking the time to explain some of the basics. 
 
Questions Bookkeeping Can Answer
 
Where does a majority of the money your small business brings in come from? How much did you spend on office supplies last year? How does your last quarter compare to the quarter prior? Where is your company hemorrhaging money and, more importantly, how can you staunch the losses? Bookkeeping can give you the means to answer these questions. 
Habitual expenses, such as automated purchases and services, can eat up a budget and add to expenses. As you isolate the areas where money is being wasted on things your business no longer requires, you can begin to tighten the purse strings. Adjusting your budget and applying new numbers allows you to think ahead and plan for the future. 
 
Only 2.5% of small businesses are audited, which means you aren’t likely to receive a visit from the IRS, but you should be prepared to answer potential questions nevertheless. In an audit, the IRS will want to know about profits, losses, tax deductions, and tax returns. All of these figures and more are underneath the bookkeeping umbrella. Which means, if you’ve been keeping accurate records, you can answer the IRS’s questions and send them on their way without delay! 
 
Then, when tax season rolls around, you can use the data you have from bookkeeping for your tax write off. Exact figures are often better than using the IRS’s substantiation rates. Bookkeeping can help you determine quarterly tax returns, to ensure you’re paying the adequate amount throughout the year. 
 
If there are mistakes with employees or customers, bookkeeping provides an accurate reference to clear up discrepancies. 
 
As a small business owner, you can anticipate certain seasons when expenses will need to temporarily increase. Bookkeeping will allow you to assess whether your current assets will stretch far enough or you need to apply for a business credit line or loan. 
 
Types of Accounts
 
Bookkeeping is split up by account types. The five types of bookkeeping accounts are: assets, liabilities, revenue, expenses, and equity. Assets are resources which add value to your business. Liabilities are obligations which take value from your business. Revenue is another way of saying income, while expenses are another way of saying spending. Finally, equity is the value left over after the liabilities have been subtracted from the assets. Here are some examples of common subtypes of accounts within these categories: 
 
    Assets

• Accounts Receivable
• Cash
• Equipment 
• Inventory
• Real Estate
• Supplies

 
    Liabilities

• Accounts Payable
• Interest Payable
• Unearned Service Revenue

   
    Revenues

• Interest Income
• Rental Income
• Sales Income

 
    Expenses

• Insurance Expense
• Interest Expense
• Rent Expense
• Salaries and Wages
• Supplies Expense
• Utilities Expense

 
How To Set Up Accounts
 
Now you know what the account types are, you’ll need to go ahead and set up the accounts in a system. As we mentioned at the beginning of this article, at one time, businesses kept their records in a ledger. Now, there are numerous options available online. You could use a spreadsheet, like Excel, although it’s not recommended. There are dedicated bookkeeping platforms, such as QuickBooks, which allow businesses ease-of-use when bookkeeping. That said, outsourcing a bookkeeper is much more time- and cost-effective than having an in-house bookkeeper. Paying someone to set up and manage your accounts ensures everything is done right and you can rest easy knowing a professional is handling your bookkeeping. 
 
However, you should still understand the basics of bookkeeping, even if you outsource. This is your business, and being able to understand the numbers will help you make decisions. 
 
Before you set up your accounts, you’ll need to decide which type of bookkeeping you’re interested in doing. Single-entry bookkeeping is just as it sounds—you enter each transaction just once. This type of bookkeeping works best for simple business with few cash transactions, little inventory, and even less equipment. An example of single-entry bookkeeping would be for an earring shop on Etsy. The owner makes the jewelry to order. When she buys supplies, she places a single value in the Supplies Expense account. When she receives an order, she places a single value in the Sales Income account. See? Simple. 
 
Now, double-entry bookkeeping is a bit more complicated, but it's actually the more commonly used method of the two. This type of bookkeeping works well with complex businesses, with lots of moving parts (e.g. employees, inventory, multiple forms of transaction). With this method, as the name suggests, you would record two entries for each transaction. The first entry is entered on the left-hand side of the account and is referred to as the debit (Dr). The second entry is entered on the right-hand side of the account and is referred to as the credit (Cr). Don’t think of debit and credit in their normal way. Here’s an example: A lawn care business invests in a $3000 lawn mower. They’ll enter a $3000 debit on the left of the Equipment account, and a $3000 credit on the right of the Cash account (since $3000 has been taken from the businesses assets to add to their equipment). Because each value is balanced by an opposite value, you know precisely when profits are beginning to drop off. 
 
Record Everything 
 
Data is no good if the numbers aren’t right. Accurate information will allow you to make the best decisions for your business and anything else could send you spiraling down the wrong track. This is why it's important to invest in a professional if you aren’t confident in your record keeping capabilities. Bookkeeping isn’t the time or place to guess, or estimate. Here, you want precise figures which correlate to real life sales and expenses. Do not leave out expenses because they’re small and “don’t count.” Every dollar counts (as the IRS would say)! Expenses include materials, services, payroll, and income from both clients, customers, investments, and dividends. You may not even be this meticulous with your personal finances, but bookkeeping for your business is a different endeavor altogether. Hopefully, booking for your business will inspire you to pour the same attention into your own finances! As well, you want to make sure you enter everything in the proper account and (if you’re doing double-entry) the proper corresponding account. This helps to ensure your books stay balanced, which we’ll discuss in more detail in the next part. 
 
 
We hope you’ll tune in for the next part of this series on Bookkeeping Basics! As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading!

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long-term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous post delves into the benefits of a 529 savings plan. If you’re saving for your education or your child’s education and would like to utilize a tax-advantaged account, our last article will tell you everything you need to know! 
 
Today, we begin the first part in our series on cryptocurrency. Cryptocurrency is a hot topic and you might’ve seen a few news stories about new forms of cryptocurrency emerging and gaining popularity. In future posts, we’ll discuss the difference between certain types of cryptocurrency, as well as the risks and benefits involved in obtaining cryptocurrency. In this post, however, we want to give you an easy-to-understand overview of what cryptocurrency is. As well, we’ll dip our toe into the still-murky waters of tax law concerning cryptocurrency. None of the information in this article is financial advice, nor do we encourage you to invest in cryptocurrency. Our objective is to give you a comprehensive understanding of this new technology and its possible implications for our society. If you’re interested in learning more, keep reading!
 
What is cryptocurrency?
 
Cryptocurrency isn’t as mystifying as it first appears. In simple terms, cryptocurrency is a digital asset. Like your home is a real estate asset or the cash in your pocket is a liquid asset, cryptocurrency is based in the digital (or virtual) sphere. Similar to how dollars used to be backed by gold and silver, cryptocurrency is secured by cryptography. Cryptography is the “art of writing or solving codes. If you’ve ever seen ‘National Treasure’ or ‘The Imitation Game,’ you’ve witnessed cryptography in action. During the first world war, to ensure messages remained secure from the Central Powers, the Allied Powers used rotor cipher machines. During World War II, the Allies and the Axis used computers to encrypt their messages. The way encryption works is pretty straightforward. You begin with plain text. This plain text is when encrypted using an encryption key (i.e. secret algorithm). Without the encryption key, the text cannot be decoded from its unintelligible state. 
 
This encryption makes cryptocurrencies one of the most secure forms of currency, since it's nearly impossible to counterfeit or double-spend. The encryption which secures cryptocurrency exists on a decentralized network. A decentralized network means each node within the network (i.e. computer) has decision-making authority or necessary software capabilities; as opposed to a centralized network, in which instance control can rest in the hands of one individual, government, or organization. The decentralized network is based on blockchain technology, which we’ll discuss later on in this series. 
 
For the reasons stated above, cryptocurrency began as a currency which was not issued by a central authority and thus—theoretically—not subject to the control of a single government. This primary philosophy has resulted in cryptocurrency being used for illegal purposes, including to escape taxes. In the next section, we’ll discuss the societal implications of cryptocurrency, both positive and negative. 
 
Instead of dollars or bills, an individual unit of cryptocurrency is referred to as a “token.” Using a cryptocurrency system, sums of money can be easily transferred without the involvement of a third party (such as a bank or other financial institution). Instead, a user has both a “public key” and a “private key,” which serve as their unique signature to approve financial transactions. There are negligible fees associated with these transactions, as well. 
 
You might be wondering: How does cryptocurrency make money? This is an article in and of itself, as there are a few ways to make money from mining and investing in cryptocurrencies. We’ll cover this in more detail in the future, so make sure you return for the rest of the series! 
 
What potential does cryptocurrency have for our society?
 
Cryptocurrency has the potential to revolutionize the way financial institutions and law operate in our society. Major institutions, such as JPMorgan and Chase, view cryptocurrency as an opportunity to streamline payment processing and lower associated fees. For others, the long term implications could include online voting and crowdfunding. Below, we’ll discuss the major benefits and drawbacks of cryptocurrency becoming the way we spend our money. 
 
    Potential Positives
 
The inflation rate for the U.S. dollar in 2020 was one-point-four percent. Inflation is the process of rising prices which results in the devaluation of individual units of currency. Or: Your money gradually lessens in value year after year. One of the potential benefits of cryptocurrency is its inflation resistance. For example, there are only twenty-one billion bitcoins in existence. Unlike the dollar, new bitcoins are not created to manipulate the value of the currency. 
 
Cryptocurrency is also lauded for its portability and divisibility. Cryptocurrency exists only in a virtual capacity. Therefore, unlike cash or large tangible assets (e.g. cars, houses, boats), the currency can be easily transferred or accessed by anyone with a computer. Similarly, most cryptocurrencies are infinitely divisible. While the dollar can be split into quarters, dimes, nickels, and cents—cryptocurrency can be into infinitesimally small fractions of itself. 
 
    Potential Negatives
 
As we briefly mentioned above, the anonymity of cryptocurrencies encoded networks allows a relatively safe haven for criminals and those seeking to evade paying taxes. In the next section, we’ll discuss how the IRS is attempting to crack down on cryptocurrency as an industry. Besides its potential to offer refuge to criminals, cryptocurrency can also be extremely volatile. Much of a cryptocurrencies value is tied to its perceived value, meaning this metric can vacillate with news events. Most currencies gain and lose value this way, but since cryptocurrency is digital and can be easily divested from, this volatility is much more drastic. 
 
Likewise, since cryptocurrency is digital, the currency is susceptible to digital attacks. Vulnerabilities within the blockchain software are prime targets for hackers, bugs, and malware. If a cryptocurrency is compromised, countless individuals' private information and funds are up for grabs. However, this is a problem faced by cryptocurrencies and financial institutions alike as we move into an age when most robberies are cyber-based.
 
Current Tax Law Concerning Cryptocurrency
 
According to a notice issued by the IRS in 2014 (2014-21, 2014-16 I.R.B. 938), virtual currencies are treated as property for Federal income tax purposes. Therefore, capital gains and losses must be reported. Until now, cryptocurrency has been largely difficult to track and tax. This inability contributes to a gap between how much money the IRS collects and how much money the IRS estimates is due. The cryptocurrency market is worth nearly two trillion dollars; and, at certain times during this year, three trillion dollars. The latest infrastructure bill, which was passed in the Senate on August 10th, includes a new requirement for brokers to report gains and losses to the IRS. This clause stirred discontent within the cryptocurrency community, fostering a fear of intense oversight and reporting obligations. The U.S. Department of Treasury has since clarified its definition of a brokerage includes “entities that transfer digital assets on behalf of another person.”  As well, reporting rules will not go into effect until 2023. Lawmakers hope new reporting rules will help raise money for planned infrastructure (estimated to cost one-trillion dollars) over the next ten years. 
 
 
We’ve only just scratched the surface with what cryptocurrency has to offer. We hope this article provided an uncomplicated entry point into the world of cryptocurrency. Make sure you come back for the upcoming portion of our series, where we will differentiate between multiple forms of cryptocurrencies and discuss how individuals make money from digital currency. We’ll also cover a host of need-to-know terms. Stay tuned! 
 
As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading!
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