Small Firm Accounting - Part 4 - Other Accounting Issues

If it weren't for having to prepare a tax return, accounting (or bookkeeping, more properly) might be just as simple as sending out invoices and paying bills. But the need to calculate profit so that the government gets paid its share, and perhaps to divide those profits among principals of the firm, adds new levels of complexity. Tagging expenses with categories also becomes an issue. Depending on your need to know, most of this can be worked out by your accountant at tax time, or quarterly or even monthly. 


If you find that you want or need a more sophisticated accounting program, it will give you the tools to get this feedback as often as you want it.

For professional service firms, taxes are reported on a cash basis. This means that you only count the money you receive or pay out in a calendar year. Depreciation of capital expenses, like a server, adds to the record keeping. But cash accounting can only tell you so much, and that is where accrual accounting enters the picture. Even though you pay taxes based on cash accounting you may want to keep the books on an accrual basis for the following reason. Accrual accounting tells you how the time and materials and services you pay for in a period of time compares to the money you earned from selling that same time, material, and service. 
Profitability is based on invoices sent out and expenses incurred whether the money is actually received or paid. With a cash system you often spend the money now and only get paid 30 to 90 days later. That is a big disconnect. Sophisticated accounting programs can present the information as cash or accrual basis to suit your needs. So can an accountant. So can you, but it takes a bit of effort. In a simple system what you want to see is your cash balance building in the checking account so that you have a balance equal to 3-6 months of expenses. You also want to see that all the invoices you have sent are more than all the expenses you have paid or that are to be paid.  

Another issue for architects is the profitability of each project. Assuming profitability varies from project to project. You need to know why. Is it the project type (new construction, remodeling, etc.)? The project size? The building type? The client type? The project manager? Clearly you would like to do more of the profitable work and less of the unprofitable work? But you can't do that until you know what the profitability is on each project. So your bookkeeping has to collect information on why you incurred all your expenses. For instance payroll has to be broken down into General Office, Project A, Project B, etc. The reprographics bill has to be allocated to the various projects. And so on. This doesn't require anything more than extra columns on a spreadsheet that looks a lot like a check register, but eventually it becomes unwieldy.

The choice of system comes down to how much time do you and your staff want to devote to bookkeeping and how much are you willing to pay others to keep things simple for you. Unfortunately allocating expenses to various projects is not something you can delegate to your accountant. 

Next time - Accounting Software Criteria

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Here are links to the other Parts:
Part 1 - Invoicing
Part 2 - Paying Bills
Part 3 - A Simple System
Part 4 - Other Accounting Issues
Part 5 - Software Criteria
Part 6 - Software Comparison