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! 

Now that we've made it through two very intense and unique tax seasons, we wanted to talk a little bit about saving money so when the next tax season comes around, it won't be such a shock to you or your bank account! We will also be talking about how to begin recovering financially from the whole of 2020! 

While many of our readers and some of us at Hoods are still reeling from the after-effects of these past two tax seasons, we can all take a deep breath and say "we did it"! We've learned a lot about the tax environment and the changes in tax law thanks to these past two tax seasons and thanks to these blogs, and we hope that all of our readers take each and every one of these lessons to heart! For many, one of the trends that we saw throughout these strange and unknown tax seasons is the fact that those tax bills have been a little shocking and unexpected. Of course, due to the pandemic, those tax bills did hit a little harder and were a little more unexpected than most have been in the past! After last year, we should all know that anything could happen when we least expect it to, and now is the time to be as financially prepared as possible. Now that we are on the other side of things and with these ideas in mind, we wanted to dive into some tips, suggestions, and ideas on how to help you save money better than you have ever before, to help prepare you for the next tax season, and to recover from the aftermath of 2020. 

After last year, and after many savings accounts, 401(k)s, and IRAs were dipped into, saving money, we're sure, is one of your top priorities right now. Getting back into your flow of saving money will help make up for what you need to do financially to stay afloat, and will also help you begin paying back what you took out of these saving accounts and to get you back on track and help you feel a little more secure financially for the first time in a long time! While no one can specifically say when we will all be back on our feet financially, we do know that there are steps you can take to get back on the right path again. One of the biggest parts towards recovering your finances and getting back on track is simply starting. Make a plan and get going! Make a plan that works for you and get started one step at a time!

If you did take money from your retirement plan or contribute to a retirement account, your decisions about how you're going to move forward from last year are going to make the biggest differences in your financial future and will help you solidify it once again. It is in your best interest to stay cool, calm, and collected right now, and to get focused. Outside of some of the tips that we are going to be sharing with you today, it is in your best interest to get back into the habit, if you haven't already, of contributing to your retirement program and your overall savings account. You don't have to start back up at the amount you were paying into either before the pandemic, but getting back into the habit of saving as you can, even with smaller amounts, can make a big difference! With all of this in mind, let's get right down to some of the best ways you can start saving money and begin to recover financially from 2020 and to be prepared for next year's tax season! 

• Online shopping became an even larger part of our daily lives last year out of need and safety. Now, you can turn it around and make it work for you! Are you looking to go shopping for any extra items or a big-ticket item you've had your eye on for a while now? Hop back online and shop smart by doing some price comparison between the items you're interested in. Never let a good deal pass you by, you have too many tools at your disposal not to! You can save a lot of money with the use of online digital codes and promotions, too. 
• While this isn't a new or groundbreaking idea, it's one you will continue to hear about because it's still such a hard and fast rule that always works! Begin budgeting better by cutting back on unnecessary expenses. We know this might be extra difficult right now as more and more things begin to open back up and (hopefully) you're working again at almost, if not full, capacity! While it's going to be very tempting to get out there and feel like normal again, take your time to ease back into normal spending until you've recovered financially. Even then, your best bet is to remain financially diligent for a while and to continue these habits throughout your life. One of the best ways to get a better idea of your money is to really understand where it's going and track it as best you can. There are a ton of excellent and helpful apps that can help you do just that! 
• While you're working to recover in multiple ways financially and beyond, part of that recovery is planning for what could come in the future. No one saw 2020 coming, and without being too cryptic, we don't know what else could be coming our way! With last year still fresh in our minds, it would be wise to start working on building an emergency fund so you won't be hurting again or in a tight spot if another year like 2020 happens again! 
• One of the best things you can do is to make a plan of how you're going to pay off all of your debt, and set real and attainable goals to do so. We do urge you to be as realistic about these goals as you can be, and to give yourself time and patience! It will take time to see the end of your debt, but it will happen and it will be worth all of your hard work! 
• Automation can be a real life saver! Choose automatic payments for as much as you can, and do it for more than just paying your bills. You can choose to have money taken out and put into your savings, retirement fund, and much more. Automated payments can make sure you don't accrue any late fees, don't spend anything rent money by accident, and can come with a few perks if you choose to go paperless and turn on automated payments with your bank and other saving establishments. 
• Try matching your savings to how much you spend every week, if not more. If anything try to match your savings and spending dollar per dollar! 
• Get creative on how you spend your free time! Look for fun and free things to do right now in your city, as it is becoming safer to do so and the weather is so wonderful! Since it is almost officially summertime in the Lowcountry, there are so many amazing things to do for free right outside your front door! Also, try and cut down on eating out! While this may not have been part of your 2020, it can be tempting to get out as much as possible now. Save for when it's a special occasion, and start cooking at home as much as you can. 
• Continue with the popular trend that 2020 rushed in with DIY projects and doing work around your home yourself. All the projects, cleaning, and yard work that you can do with no problem, keep doing them! This can be a huge money saver! 
• While traveling does sound very tempting after the year we've had and the prices for plane tickets are looking very appealing, pump the breaks before you book ten trips back to back this summer! Continue to be smart about your overall budget and let that include your travel budget too. 
• Don't just save because you want to save. While we always recommend having an excellent savings account and financial plan, go one step further. Sit down and understand what you're saving for. A nest egg? Emergencies? College? Vacation? Your dream home? All of this and more? Whatever it might be, understand exactly what you want. Visualizing it can make saving money a lot easier. You can see and say exactly why you're putting this money away, not just because you know it's the right thing to do! 

While this list of the ways to save money and ways to begin repairing your fiances after 2020 is just a small one in comparison to all the savings options out there for you, it is a great place to get started! You need to find what works for you, financially, and commit to it! If you have any questions, comments, or would like to discuss your financial options of how we can help you, please never hesitate to reach out! Please remember that we are your leading experts and tax preparers in the Goose Creek area to help with tax prep, throughout tax prep season, the best accounting services in Goose Creek, the best tax preparation in Goose Creek, business consulting in Goose Creek, bookkeeping in Goose Creek, or payroll services in Goose Creek, we are here for you! Our phone lines and inboxes are waiting for you. Don't hesitate! Please stay safe, everyone. We will see you soon!