​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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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 about how to avoid impulse spending is available for your reading pleasure and we hope you’ll return to the blog for our upcoming series on cryptocurrency!
 
Today, we’ll be discussing a hot topic for parents and students alike—a college savings plan! Most parents save for their kids college fund the old fashioned way, by allocating a portion of their monthly income into a standard savings account over a number of years. However, we are here to tell you there’s a better way! There are savings plans created specifically for the purpose of paying for your child’s education-related expenses and which allow multiple family members to pay into the fund! According to Peter Mansfield, the chief marketing officer for U-Nest (an app which allows savers to open 529 plans), about seventy percent of families are unaware 529 plans exist. And, according to a 2018 study done by Morningstar, families are missing out on an estimated $237 million in future educational savings due to the misuse (or lack of use) of 529 savings plans. 
 
In this article, we’ll discuss what a 529 savings plan is, its stipulations, and its benefits. Therefore, if you’re interested in making your money work for you, read on!
 
What is a 529 Savings Plan?
 
A 529 savings account is a tax advantaged savings account which allows for tax-free growth and tax-free withdrawals on qualified expenses. Traditionally, these savings accounts have been used to pay for expenses related to attending colleges and universities, including: 

• Tuition
• Room & Board
• Books
• Fees

In actuality, there are two types of 529 savings plans. The first type of plan is referred to as the prepaid tuition plan. This plan allows individuals to buy tuition credits for future use at today’s prices. However, the prepaid tuition plan cannot be used to pay room and board or expenses unrelated to tuition. Which is why the second type of 529 savings plan—the education savings plan—is considered the more flexible option of the two. The education savings plan allows individuals to pay for any of the education-related expenses stated above. As well, this type of plan can be invested in higher-risk, potentially higher-return options like stock funds. Though, keep in mind, the value of this savings plan is not insured by either state or federal governments. This means potential losses are your responsibility. 
 
How do I set up a 529 Plan?
 
Before setting up a 529 savings plan, you’ll want to shop around at a multitude of financial institutions to find the best option for you. The key elements to keep in mind when comparing savings plans are: low costs, good benefits, and a solid investment track record. Low costs means the institution isn’t charging outrageous fees to open an account or for its servicing of your account. Any money spent on fees is money which isn’t going into your account. Good benefits could include tax deductions for contributions. Only select states (i.e. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania) offer deductions on state income tax for contributions to a 529 savings plan. Finally, a solid investment track record means the institution has shown a consistent ability to increase its savers’ contributions (especially in years when the market did well). Depending on your goals and the age of your child, you might prefer an institution with a more aggressive or conservative investment style. 
 
Next, you’ll want to name a beneficiary. This can be your child, grandchild, niece, nephew, or yourself. Yes, that’s correct—you can open a 529 savings plan for yourself. If you’re looking to accelerate your career by going back to school or switching your career entirely, a 529 savings plan can be used for eligible graduate programs. Or, you might consider investing in a 529 savings plan as a career emergency fund. The coronavirus pandemic saw massive job loss and wage cuts. Many individuals are rethinking their career path and their job security in the wake of the pandemic. A 529 savings account can be a good way to prepare for the unexpected. 
 
You’ll need to name contributors. Again, this can be anyone related to you or your beneficiary. 
 
After you’ve set up your account, chosen the type of savings plan you prefer, named a beneficiary and contributors, the only thing left to do is contribute after-tax money and watch your savings grow! 
 
How did the SECURE Act change 529 Plans?
 
The SECURE Act, passed in 2020, changed how the 529 savings plans could be utilized and actually broadened their use. Now, the list of qualified education-related expenses extends to upgrading technology (such as computers and laptops), purchasing printers, internet service, necessary software, and anything else required by the beneficiary’s institution to adequately complete their education. 
There’s more! The education savings plan can now be used to cover K-12 private school tuition (some limitations apply). This means you can invest in your child’s entire education before they’re even born! 
 
As well, 529 savings plans have been approved to pay off up to $10,000 per year in qualified education loan repayment. Student loans have been a hot topic as of late, as more and more studies show the millennial generation struggling to retain wealth at the same rate as their predecessors due to crippling student loan debt. No parent wants to see their child struggle to live because they choose to pursue an education. Likewise, no individual wants to be plagued with paying student loans for upwards of thirty years. Even if you did not invest into a 529 savings plan prior to your child going to college, you can still help them pay off their loans quicker!
 
Hold on, there’s more! Registered apprenticeships, certified by the U.S. Department of Labor, are also eligible to be paid for with 529 savings funds. Apprenticeships are an avenue to earn credentials and experience, learn a craft hands-on, and jumpstart your career. Certified apprenticeships might include software engineering, business analysis, or even working on The Late Show with Stephen Colbert! To explore potential apprenticeship opportunities, click here.  
 
We’re almost finished! Finally, if the chosen beneficiary of a 529 savings plan does not utilize the entirety of the savings fund, the remainder of the funds can potentially be transferred to a qualified sibling or relative! You can rest assured knowing each dollar you put into a 529 savings plan can be used to your or your child’s benefit. 
 
 
To reiterate, the benefits of a 529 savings plan are: The ability to have your savings invested and grow at a rate far faster than an average savings account. The ability to both investment gains and tax benefits, including the state income tax deduction (in qualifying states). The flexibility to choose the plan which works best for you and your family. The ability for multiple family members to contribute to a single plan, as well as for a single plan to rollover to multiple family members. As well as much, much more! The benefits of a 529 savings plan for families and individuals are endless. Allow your savings to work for you and invest in a 529 savings plan today! 
 
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 about the differences in subcontractor and independent consultant taxes is available for reading and we hope you’ll return to the blog for our upcoming series on cryptocurrency!
 
Late summer means vacationing to tropical locales, brunching with friends under the noonday sun, and shopping for the impending return to school. With a long list of potential expenses already pulling on your wallet, it’s easy to end up overspending on items which were never on your list in the first place. Today, we’ll be exploring what impulse spending is, how you’re susceptible, and why it could be hurting you in the long run. Finally, we’ll go over a handful of ways you can curb impulse spending and keep those extra dollars for yourself!
 
What is Impulse Spending
 
We’ve all been there. You’re standing near the cash register, ready to checkout, and just there—a well-placed, beautifully displayed cache of candy. You decide to grab a chocolate because you deserve a treat and it’s only two dollars. What’s the big deal? 
 
That’s an impulse purchase. 
 
An impulse purchase, or impulse buy, is any purchase you weren’t planning to make. Some can be small, like the example we just went through. Others can be quite large. If you’ve ever walked into a big-box store and felt the urge to drop seven-thousand dollars on a hot tub or trampoline—that’s an impulse. We cannot help most of our impulses; they’re subliminal and inspired by a range of factors outside of our control. However, most of us can control whether we follow through on the impulse to buy something we know we don’t need. We’ll provide you with the tips you need to resist impulse spending. Keep reading!
 
Why Reigning in Impulse Spending Is Important
 
On average, Americans spend $2,196 on impulse buys each year. Yes, those chocolates and trampolines do add up after a while. Imagine if you put the same amount towards your thirty-year mortgage? You’d shave off the grand total of your house by over sixty-five thousand dollars. About ninety percent of Americans say they indulge in impulse spending, with nineteen percent saying they spent more than one-hundred dollars on their last impulse purchase. Amazingly, nearly sixty percent of all purchases are unplanned. In 2020, the top five impulse buys included cleaning supplies, hand sanitizer, toilet paper, hand soap, and canned. These impulse purchases can tell us a lot about ourselves as a society and what we value, but they can also reveal our fears and deep-seated insecurities. We’ll discuss the reasons why we impulse buy in-depth later.
 
Right now, we’ll focus on how impulse spending might be negatively affecting your life. Impulse spending might be holding you back from reaching your long term financial goals. Do you look around at the end of the month wondering where all of your money went? Chances are your money is going toward unplanned and unregulated expenses. Furthermore, impulse spending can be a major point of contention between you and your partner. We all want to be able to trust our significant other with shared money and impulse spending may be degrading that bond of trust. Finally, impulse buying is often a response to feelings of unhappiness and lack within ourselves. As we know, most purchases won’t have a lasting positive impact on your emotional state, but will have a lasting negative impact on your pockets. 
 
The Psychology Behind Impulse Spending
 
Who is most likely to make purchases impulsively? Men might believe women are, but the opposite is actually true. Men are more likely than women to make an impulse buy, with the percentage of men who regularly make impulse purchases being 26% and the percentage of women who regularly make impulse purchases being 16%. Research suggests extroverted people, as well, are more likely to buy impulsively. This may be because the personality factors linked to impulse buying—openness, conscientiousness, and neuroticism—also correlate to extroversion.  People who are highly susceptible to stress will often use impulse buying to manage their stress levels. Distracted or tired people have less mental capacity to make good choices, therefore they are also more likely to buy impulsively. On the whole, people who feel confident, complete, and fulfilled by their lives are less likely to make impulse purchases. 
 
Emotions shouldn’t play a part in how we spend our money, but they often do. There are four emotional factors which contribute to impulse purchasing. They are:

1. Immediate Gratification 

 
This is when purchases are used as a pick-me-up on a stressful day. If you’ve been working hard or are exceptionally bored, it's easy to justify a small purchase which will bring you joy and excitement for a brief period of time. These purchases are often food-based (e.x. Fast food, candy), entertainment-based (ex. a movie ticket, a book), or appearance-based (e.x. cosmetics, clothes). 

1. Loss Aversion 

 
This is when purchases are made out of a fear of missing out on something good. Perhaps you’ve noticed your friends are frequenting a once-a-year sale or you received a newsletter in your inbox detailing a twenty-four-hour sale. You might justify this purchase by saying it’s a limited time offer and you’re saving money. More than half of shoppers impulse buy because of a sale. The truth is, marketers understand our very human desire to take advantage of opportunities we fear won’t come around again. 

1. Stockpiling

 
This is when purchases are the result of a fear of running out of a supply of something. In 2020, we saw people rush to stores in droves to buy toilet paper out of a fear there wouldn’t be any (for some reason). Well, there were toilet paper shortages in some places—because of this fear-based activity. Alternatively, you might stockpile more of your favorite shampoo than you technically need because another brand of shampoo once discontinued your go-to. Again, this is emotion-based spending. 

1. Biased Evaluation of Use

 
This is when we overestimate how much use we’ll get out of a product in its lifetime. We might justify a clothing purchase by saying how much we’ll wear the item, or a kitchenware purchase by how much we’ll use it to cook. The truth is, if we look in our closets and kitchens, there are plenty of clothes and gadgets we don’t ever use. Regardless of how much we liked them when we first bought them. 
 
Another factor which contributes to how we spend our money, which is a little harder to pin down or solve, is how we were raised. The state of our household finances when we were growing up can play a large role in how we choose to spend our money as adults. If your parents spent money when they were feeling low or fought excessively over small purchases, you might be inherently emotionally predisposed to impulse buying. Being aware of how we’ve been influenced can go a long way towards altering our conditioned behavior. 
 
Advertisers are knowledgeable about psychological weaknesses and use these weaknesses to make sales. In advertising, these psychological weaknesses are called pain points. Be conscious of how ads and promotions might be appealing to your particular pain points to avoid falling into any marketing traps. 
 
Methods for Avoiding Impulse Spending
 
There are a ton of ways to avoid impulse spending and you really need to find the one which works best for you. Most financial institutions will recommend making a budget and simply sticking to your budget. Obviously, anything which hasn’t been factored into your budget will not be purchased, thus eliminating impulse spending. However, it's not always this simple. You have to be realistic when creating a budget. If you know you like the occasional cup of coffee in the morning or a night out on the town with friends, you shouldn’t try to cut these things out. Instead, you should plan for these expenses. Budget five or six coffees and one or two nights out into your monthly budget. This removes the impulse from the purchase, rendering you guilt-free. 
 
Beyond a budget, you have to determine what’s important to you in the long term so you can stop prioritizing short term gratification. What are your financial goals? How long have you estimated before you reach them? The next step is to take stock of your current finances and see how much of your money is being spent impulsively. Recheck the numbers and see how much faster you would reach your monetary goals if you reallocated your impulse buy expenditure towards them? The answer may give you the motivation you need to save. 
 
As we discussed, our emotional state can drive us to make decisions we wouldn’t otherwise make. Ever heard the saying, “don’t go grocery shopping when you’re hungry”? Well, this applies in all scenarios. You shouldn’t shop when you’re overwhelmed, tired, stressed, or hungry. For the same reason, you shouldn’t shop later at night. Potentially sleepy from a large meal and few glasses of wine, your critical thinking skills and inhibitions are lowered. It’s a recipe for disaster. 
 
The tried-and-true method for cutting down on impulse spending is to wait before making a purchase. Chances are, within a week or even a day, the impulse will have gone and you’ll be left wondering why you wanted the item in the first place. In this vein, don’t allow timed deals to force your hand. A clock counting down the minutes until the end of the 50% Off BOGO Sale might induce a feeling of low-grade anxiety, but just remind yourself the sale will be back around eventually and you can wait. 
 
It’s recommended you bring cash to the store and only the amount you need. This can curb overspending. A study done by Bankrate.com found that people who used charge cards at restaurants spent fifty-percent more on average than those who used cash. This may be because of the physical element of holding bills in our hands and being unwilling to part with the feeling.
 
Another tip is to take stock of what you already own. You’ll avoid buying things you already have that you forgot about and may come to develop a deeper appreciation for what you currently own. 
 
A great piece of advice is translating the cost of an item into time. For example, if you make $14 an hour after tax and a dress you want costs $98, then the dress costs seven hours’ worth of work. Is it worth it, though? This added bit of mental work may be enough to prevent you splurging in the moment. 
 
The last two tips are small but effective. If you’re shopping online, we recommend you read reviews and put everything you want in the cart. Pay attention to the bad reviews especially. They may be enough to turn you off of a purchase. The effect of putting everything into the shopping cart and then leaving the site is a feeling of low-grade satisfaction. You’ve picked out everything you want to buy, which gives your brain a small jolt of dopamine, and might be all you really needed. 
 
 
We hope you’ll utilize these tips to avoid impulse spending and reach your financial goals. For more information and advice on saving, spending, taxes and more—make sure you return to the Hoods Tax & Accounting blog! We’re here to help in any way we can! If you have any questions or are interested in a consultation, we are providing meetings over Zoom. For any other assistance, please reach out by calling or emailing! Thank you for reading. Until next time! 

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes and 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!
Today, we’ll be discussing the distinction between subcontractors and independent consultants. The tax implications of each classification are relevant to both employers and potential clients. If you aren’t sure where you fall between the two classifications, we’ll outline the specifications of each and how the IRS differentiates between the two. Keep reading to learn more about these non-employee positions!
 
What are Subcontractors?
A subcontractor is, as the title implies, a type of contractor. A subcontractor can be an individual or a business entity. In short, the subcontractor engages in a contract to perform a certain portion of the duties of a primary contractor’s contract. Typically, subcontractors specialize in a particular area of expertise. There are as many subcontractors as there are industries, ranging from construction to communication to food service. A subcontractor rarely engages directly with the client who is procuring their services. Rather, the subcontractor engages with the primary contractor who engages with the client. Subcontractors are considered self-employed by the IRS.
 
What are Independent Consultants?
According to the IRS, independent consultants (also known as independent contractors) are individuals who conduct themselves as businesses. Their clients have the authority to specify the end result of their work, but no authority to specify what will be done and how it will be done. Independent consultants can be classified as self-employed or as an employee of their own company; each classification has its own tax implications. Independent consultants can hire subcontractors.
 
What is the difference between a Subcontractor and an Independent Consultant?
An independent consultant engages directly with a client. They procure their own business, promise their services, and enter into contracts. They purchase their own health insurance and benefits. A subcontractor engages with a senior contractor. They apply their skills to projects brought on board by the senior contractor. They enter into what are called subcontractor agreements—which outline their roles and responsibilities, deadlines, duration, and tax liability. Independent consultants and subcontractors file their taxes differently. 
 
What are the advantages of being or hiring a Subcontractor?
As a subcontractor you have autonomy over your own time and methods. You are hired to produce a result. However you choose to come to the result has no bearing, so long as the finished product or service is high-quality and to specification. You have nearly unlimited flexibility on how you go about completing your work. As well, because you work on a contract, you need not worry about being fired abruptly. 
Contractors will often hire subcontractors because they need someone who specializes in a certain area. As well, hiring subcontractors can cut down on costs and mitigate project risks. 
 
What are the disadvantages of being or hiring a Subcontractor?
As a subcontractor you are responsible for keeping track of and paying your own income tax. This can be quite tedious and time consuming. If you don’t stay on top of your taxes, you can end up with fines or other penalties. As well, since you are not an employee, you miss out on many of the benefits given to employees by their employers, including but not limited to: health insurance, 401k, vision, insurance, etc. 
Contractors who hire subcontractors are on the hook for their subcontractor’s behavior. Even though they’re not an employee, they still represent your company. If a subcontractor fails to perform their duties or performs their duties at a subpar level, there is little recourse by way of discipline. You’ll need to shell out more time and money in order to find someone else to complete the work.
 
What are the advantages of being or hiring an Independent Consultant?
Independent consultants, much like subcontractors, are free to structure their own time and work flow. They choose where and when to work. As well, they have the final say on their health insurance carrier, office equipment, travel plans and more. Since their business is their own, their control is near total. As well, there may be some tax savings opportunities (which we’ll go into later). 
 
What are the disadvantages of being or hiring an Independent Consultant?
The downsides of being an independent consultant are twice-fold that of being a subcontractor. Primarily because, as an independent consultant, you are responsible for finding your own work. This can require copious amounts of time, energy, and money. You must pay for your own marketing and advertising. You must convince each new client of your expertise and trustworthiness. This can, at least in the beginning, distract from the work you got into business to do. 
As well, there are numerous expenses. Everything you have the final say on—health insurance, 401k, vision, dental—you must also pay for. 
Then there are the administrative tasks to consider. Bookkeeping, invoicing, and preparing for tax season fall on your to-do list as an independent consultant. 
 
Why are neither of these classified as employees?
The IRS uses three considerations when determining whether someone’s position classifies as an employee. 

1. Behavioral
2. Financial
3. Type of Relationship

 
The first category is concerned with the degree to which another party controls when, where and how the work is done. As previously stated, both the subcontractor and the independent consultant are free to choose where they work, when they work, and in what manner the work is completed. 
The second category is concerned with who holds the responsibility for expenses related to work. In the case of the independent consultant, the answer is the independent consultant. These work-related expenses can be deducted from their income tax at the end of the tax year, but the consultant must shoulder these costs until then. In the case of the subcontractor, they may or may not be responsible for work-related expenses, as this depends on the primary contractor. However, most subcontractors are responsible for providing their own tools and necessary equipment.
The third and final category is concerned with the relationship between the business and the worker. Is there a written contract between the two parties? Does this contract specify the duration of the relationship and any benefits provided? 
These three considerations are what preclude both subcontractors and independent consultants from the employee classification. 
 
Tax Implications of Both Classifications
Subcontractors who made over $600 will be issued 1099 forms at the end of the year by their primary contractor. These statements include the total amount paid out to the subcontractor in that tax year. The subcontractor will need to gather any business expense receipts. Anything which was bought in order to generate, maintain, or perform business is deductible (i.e. cell phones, office supplies, tools, self-employed health insurance). If you use a room in your home as your sole office, you might even be able to deduct its cost from your income tax. You’ll also need a 1040 Schedule C - Profit or Loss From Business form, which you can download from the IRS website. 
As an independent consultant, things are a bit more involved. You’ll need an Employer Identification Number (EIN), which can be obtained free-of-charge on the IRS website. Then, you’ll need an account on the Electronic Federal Tax Payment System (EFTPS). You will need to pay unemployment taxes, potentially at the state and federal level. As well, you may need to pay payroll taxes. 
 

 
The freedom of being a subcontractor or independent consultant comes with an added sense of responsibility. You must stay on top of your finances. We recommend you consult a tax professional, especially if this is your first year as either classification. We also recommend paying your taxes quarterly instead of annually to avoid running into any problems at the end of the year. If you’re diligent and detail-oriented, there’s nothing to stop you from being a successful subcontractor or independent consultant.
 
Check back into the Hoods Tax & Accounting blog for more information on taxes, saving, and financial literacy! We’re here to help in any way we can! If you have any questions or are interested in a consultation, we are providing meetings over Zoom. For any other assistance, please reach out by calling or emailing! Thank you for reading. Until next time!