What are Operating Expenses? (Explanation) - Ledger Bench

Operating expenses are incurred by businesses to keep the business going, includes staff wages, supplies not include manufacturing cost. Operating expenses does not include manufacturing cost or cost of goods sold (direct labor, material, manufacturing overhead) or capital expenditures (building or machinery) 

What is included in Operating expenses?

Following are included in operating expenses:

• Insurance
• Rent
• Research
• Utilities
• License fees
• Accounting fees
• Office supplies
• Attorney fees
• Vehicle expenses
• Travel expenses
• Payroll for staff excluding labor for manufacturing 
• Marketing including social media channels such as Facebook
• Building maintenance and repairs
• Property taxes on real estate

Operating expenses are reflected in the company's income statement.

What does an increase in operating expense mean?

An increase in operating expense would mean less profit for a business. Often operating expenses receive more scrutiny from a company, as these types of costs may be less fixed, and their non operating expenses, capital expenditure and manufacturing costs. 

A company’s area manager would try to reduce operating expenses by outsourcing a few areas of business or allowing some employees to work from home. This cuts down actual physical space used by the staff. Management may also try to implement money saving techniques such as automating parts of the business or reducing salaries for the new hire. 

You May Also Read - IRS Tax Relaxation Deadlines for Covid-19 (With State Regulations)

What is a non-operating expense?

A non-operating expense are the expenses that are not related to the company's day to day business operations or manufacturing. These include costs for:

• Depreciation
• Amortization
• Bank fees including interest charges
• Restructuring costs
• Obsolete inventory including products that cannot be sold
• Lawsuit payments and associated fees
• Currency exchange fees

Are operating expenses included in COGS?

No, operating expenses and cost of goods sold (COGS) are shown separately on a company’s income statement. This is because COGS are directly related to the production of a product as opposed to daily operations. 

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Operating Expense Ratio:

The operating Expense Ratio (OER) is the cost to operate a piece of property compared to the income the property brings in. It is a very important ratio to use in real estate, such as with companies that rent out units. A low OER means that less money from income is spent on operating expenses. 

OER can also be used to gauge the difference in operating cost between two properties. 

For example, a company owns two plants in New Jersey, with similar outputs, and one’s OER is 12% more than the other, management must investigate the reason why this difference. 

Are Wages operating expenses?

Administrative expenses such as full-time staff salaries or hourly wages are considered operating expenses for a business. The cost of hiring a labor to produce a product is calculated separately under COGS and is not an operating expense.

Top 5 Things You Need to Know Regarding PPP Loans Amidst Covid-19

In the wake of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the United States has conferred an additional $310 billion funding to the Paycheck Protection Program (PPP) that was almost running out of funds in April. The importance of PPP is ever-important in these times of economic uncertainty as PPP is one of the few opportunities that small businesses have to obtain forgivable loans to sustain employees on the Payroll services.

But, there are so many questions that are yet to be answered and cleared for entrepreneurs, especially in the light of the forgivable nature of the PPP loans.

Another burning issue here is the grey area, where many public companies confessed to having taken the PPP loan which was truly meant for small businesses with employees less than 500.

To contain such malpractices, the federal government has come out with the briefing that the authorities will audit any company that levies for loans more than $ 2 Million.

This blog will provide answers to all the commonly asked questions and queries related to the PPP loan and how it can benefit your business.

Question 1: What costs are eligible for forgiveness under the PPP?

Answer: The actual forgivable part of the PPP is dependent on certain factors. These are based on the payments made and the costs incurred during the COVID-19. These are the costs that are eligible for forgiveness in the PPP loans:

• Salary and wages or other similar payroll compensations.
• Payments that have been made in the light of sick leaves.
• Allowance for separation.
• Payments made for group health care benefits, including insurance premiums.
• Retirement benefits
• State or federal payroll taxes
• Please note that cash compensations that exceed $100,000 are exempted from this excuse. Additionally, the employer's share of the federal payroll taxes is also exempted from being forgiven under the PPP.

Question 2: What costs are not eligible for forgiveness under the PPP?

Answer: Although the PPP loan is a breath of fresh air for businesses who are trying hard to genuinely retain their employees, there are still certain costs that are exempt from being forgiven under the PPP loan. These are:

• Payments made to independent contractors.
• Under the Family First Coronavirus Response Act, there are qualified sick leaves and parental leave wages. These, therefore, are exempt from the forgiveness under the PPP.
• If we take February 15, 2020, as the benchmark date; then any interest payments on personal property, rent payments under agreements in existence, and utility payments like electricity bills, etc. are also not permitted for forgiveness under the PPP loan.

Question 3: What are the limitations of loan forgiveness?

Answer: There certainly are limits to forgiveness in the PPP loans. The first is that not more than 25% of the loan forgiveness can be linked to non-payroll costs. Additionally, proceeds directed towards advance up to $10,000 on Economic Injury Disaster Loan will also be deducted from the loan forgiveness amount.

There are two formulas to determine the forgiveness amount in the loan deduction. The FTE Method and the reduction in wages.

The loan forgiveness amount is subject to reduction by multiplying it by the following fraction. These are as follows: (This is known as the FTE method)

• The numerator of which is the average number of FTE employees per month employed by the borrower during the covered period.
• The denomination of which, as elected by the borrower is:

1.  
1. The average number of FTE employees per month (from Feb 15, 2019, to June 30, 2019)
2. The average number of FTE employees per month (Jan 1, 2020, to Feb 29, 2020)

The second is the reduction of wages method. This method is applicable as follows:

• Identify employees who did not receive the salary at an annualized rate of more than $ 100,000 for a single day in 2019.
• Compare each covered employee’s wages during the period to his/her salary during the first quarter of 2020.
• For an employee who is covered, the salary is reduced by more than 25%, then you need to apply the following formula:

1.  
1. Multiply the first-quarter wages by .75
2. Subtract the result from the covered period wages

• The aggregated dollar amount will reduce the loan forgiveness amount. 

Question 4: What are the documents that you need to apply for forgiveness?

Answer: To receive the loan forgiveness, you need to comprehensively submit accurate copies of the following documents, complete and updated:

• Documentation to verify the number of FTE employees on the payroll. This also includes the payroll tax filings.
• Canceled checks, payment receipts, and transcripts of accounts verifying payments of mortgages, rent and utility payments.
• You also need to submit an authentication certificate from a representative of the business that certifies that the information and documents submitted are accurate and the amount that is requested for forgiveness, will help retain employees.
• In addition to these, the SBA can also ask you to submit additional documents to solidify and authenticate your case. 

Question 5: Are large businesses with adequate sources of liquidity qualify for a PPP loan?

Answer: No, the essence of PPP loans was to help small businesses, retain employees, and sail through these financially crunching times of COVID-19 smoothly. If larger businesses, who have enough sources of liquidity take this PPP loan, then the small businesses will be crushed under undue competition. Hence, as per the federal laws, for any business that takes up a loan above $ 2 Million dollars, will have to undergo a complete audit. 

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What Does Your Business Need?

The essential element in COVID-19 is to sail through with as little damage as possible. With the PPP loan and the secure ability to seek forgiveness on the loan is a boon in these times. You need to seek spaces where you can seek the maximum benefits and forgiveness on the PPP loans. We hope that your essential queries were answered and cleared through this blog. For any additional query and query on the PPP loans and how it affects your business.

What is Vendor Reconciliation? – Ledger Bench

What is vendor reconciliation - definitely accounts related job. It’s part of accounts payable activity where one has to reconcile vendor balance in his books of accounts.

The vendor reconciliation process in AP is a procedure aiming to clear misstatements and errors that might’ve occurred during the period between the last reconciliation and the current date.

We usually carry out AP reconciliations as part of audit procedures during annual financial statements audit or other agreed-upon procedures. The focus is on ensuring accounts payable is neither under- nor overstated. The process is based on fraud risk assessment for the entity or its vendors, and we carry it out under the relevant audit standards (e.g., ISA here in Europe).

The aim is to make sure that all invoices, payment transactions, advances, and any other liabilities or accrued expenses, are correctly disclosed in the financial information of the company.

When performing the reconciliation procedures, there are a few types of reconciliation you can perform:

• Reconciliation of Accounts Payable ledgers to General Ledger (AP module to Trial Balance);
• AP reconciliation via confirmation letters sent to the vendors, in which they confirm their transactions and balances.

The first procedure can help us identify technical errors, as cases where an invoice was paid but was not closed correctly in the AP module.

The second procedure provides more assurance from audit and controlling perspective, as it relies on external information.

Even outside the premises of financial audits, local laws and regulations sometimes require regular AP reconciliations (and not only accounts payable). As an example, here in Bulgaria, companies are obliged under the Accounting Legislation to perform at least one annual “stock-take” on all assets and liabilities. One way we usually approach the confirmation of vendor balances is by sending confirmation letters to all our vendors.

It is also a good idea to do so, as anytime we undergo financial audits, the consulting firm always selects a few vendors with large balances and transactions to confirm. Having already communicated with these vendors, obtained their confirmation, and looked into any identified discrepancies, it gives us the information ready for the auditors.

It is essential to know that in some cases, vendors are unwilling to confirm balances, due to a variety of reasons, most often lack of time and interest.

What we can do then is get the last balance that was confirmed (usually the prior year reconciliation). Then we will add all received invoices from the vendor, and look at all deliveries from the vendor, to make sure we have an invoice for every shipment. Then we will subtract all payments issued to this vendor. That way, we recalculate the outstanding balance and can confirm it, or explore possible discrepancies. Remember, that this is not as good a procedure as having an external confirmation, and auditors or other regulating entities may not accept it.

A Beginners Guide to General Ledger – LedgerBench

A general ledger is the backbone to your accounting activities. Read the blog to know what it is, how to maintain & it benefits your business. Ever since business and trade continue to exist in the modern-day world, so do General Ledgers! Whether the mode to assemble one’s business financials was on an abacus, on paper, or in the current day world of computers; the general ledger has continued to be of importance regardless, the day and age you are in.

For every business, it is important to know the pivotal role played by a general ledger as it includes the culmination of all your financial reports and statements.

Businesses use ledgers to document the money that they are paying or are being paid to them.

What is General Ledger?

The general ledger summarizes all the information about your business. It includes all the company’s accounts and transactions and is the financial foundation of the business. The ledger is divided into 5 categories:

• Assets
• Liabilities
• Equity
• Revenue
• Expenses

Therefore, the number of funds that were credited and debited to your business, get accounted for in General Ledger.

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What are the Different Elements of a Ledger?

Let us delve a little deeper into what are the different elements of a ledger.

• Assets: Resources that are owned by the business and that give out any value are known as assets. These resources of values can range from cash, properties, inventory, and equipment, etc.
• Liabilities: Things like taxes, employee wages, mortgages, etc. come under the category of liabilities. These include the future financial debts any business has to pay.

• Equity: This involves the difference between the assets and liabilities of a business. If the proportion of liabilities in excess to that of the assets, then that is known as a case of negative equity. An inverse situation is known as positive equity.

• Revenue:  The income that a business earns through the sale of its products and services is known as revenue. These include sales, royalties, or any other earnings that a business makes.
• Expenses: When a business pays in return for services and products that are purchased are known as expenses. These include rent, travel expenses, etc.

Reasons Your  Business Needs a General Ledger:

The general ledger is a culmination of all your financial reports. It is a reflection of the financial position of your business; there are many reasons as to why it is important for your business to keep a general ledger:

1. It includes the accurate financial transactions of your business.
2. It helps you balance your books by giving you a complete understanding of where you need to pay more attention.
3. Filing taxes becomes easy when all your transactions are in one place for you to work on.
4. It helps you spot unusual transactions and potential fraud easily.
5. It helps you analyze key financial statements that help you with assessing your profitability, and overall financial health promptly.

Suggested Reads - Why Bank Reconciliation is Important?

What is the Difference Between General Ledger and General Journal:

There are many instances where the general ledger and the general journal are confused with each other. Where the former is a summarization of all the financial information of your business. The latter keeps a record of all the transactions made in the business.

The various financial transactions as they occur through the day are recorded in the general journal. In addition to that, when the financial transaction occurs and the source document for the same is generated, then it is recorded in the general ledger.

General Ledger and Double Entry Bookkeeping:

There are two branches of accounting, the single account method, and the double-entry bookkeeping method. The former works fine if your needs from your accounting activities are limited. Whereas, double-entry bookkeeping every transaction affects two accounts at the least. One that is debited and the other that is credited. The two should always be balanced, i.e. the total debit amount= the total credit amount.

A general ledger is used to summarize all the transactions that are recorded in the double-entry bookkeeping system.

The Backbone of Accounting Financials: 

The general ledger is used to record all the company’s assets, liabilities, revenue, expenses, and equity, etc. These are then required to build and collate the balance sheet and income statements. All these together form the backbone of the accounting needs of any organization.

Wrapping Up: 

Financial logistics are taken care of when all the transactions are appropriately added to General Ledger. An updated ledger with all the transactions duly recorded is the first step to ensuring the financial health of your organization. We hope that through this blog, you are able to understand what general ledgers are, and their importance for your business.

The Ethical Accounting Turns Away Bad Business to Remain a Priceless Addition to Any Business

What would you do if one of your clients owed a huge amount of money in back taxes and they subsequently asked you to delete their QuickBooks® file, create a new one under a false name with no liabilities on the books and tell their creditors that they had moved out of the country?

That may seem pretty far-fetched, but the shocking truth is that this actually happened to a bookkeeper at our firm. While situations as outlandish as this one probably don’t come across our paths every day, the reality is we are all faced with having to choose, on some level, between ethically sound practices and retaining revenue that pays our bills!

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So, where do we draw the line? As a business in a highly competitive marketplace where the lowest price always seems to win, how do we make the hard decision to turn down revenue because we simply can’t comply with an unethical request of a client? In this case, I think it is helpful to keep your end goal in mind. As bookkeepers and accountants, we are not just working to deliver a P&L, but we are also working to see small businesses and entrepreneurs equipped to thrive in their markets. By doing this, we get to participate, firsthand, in the building of stronger communities. We want to create an amazing experience for our customers and command fair rates for our service.

If these are our goals, then it’s important to build a brand that operates with integrity in every aspect. By doing this, you communicate to your clients that they can trust you with their business – which often represents their blood, sweat, tears and dreams, not to mention the largest asset on their personal net worth statement. They can be confident that you have their best interest in mind, that you, yourself, refuse to tarnish your own brand and that you won’t allow them to make decisions that will hurt their own integrity. Many times, clients don’t know what’s legal or illegal to do; it’s our job, as accountants, to protect them!

While there may be potential loss of revenue when you refuse to write something off – just like the shady guy next door used to – you are really doing your business and sales efforts a huge favor! A bad reputation spreads faster than a good one, so it’s better to be known by a few good people in town as trustworthy than known by everyone as the shady accountant who will do anything for a buck.

As accountants and bookkeepers, we need to be known for our strong moral compass, if we are to remain valuable in the workplace. The reality is that technology will continue to improve in a way will make data entry irrelevant. IBM’s Watson is already doing the heavy lifting for understanding the tax code, and QuickBooks Online has resources for business owners to participate in the bookkeeping.

Ethics is more than just keeping yourself and your clients out of jail; it’s also about being a trusted and valuable asset for the business that chooses to employ you. Your value is not that you can process a shoebox of receipts in one sitting, or that you can complete a tax return in a day; your value is what you can add to the organization as a trusted and ethical member of their team. An ethical accounting that makes the organization safer and stronger is a valuable accountant, and a valuable accountant that cares about the success or failure of the business is priceless.

How Financial Preparation Services Can Help You?

With student debt being higher than ever before and a record number of student loans falling into default, it’s become clear that people need assistance with paying down their student loans. No one wants to start their post-education lives struggling under the weight of crippling debt, but many do. Companies like Financial Preparation Services have made a name for themselves by helping their clients with finding all the helpful government programs available to them and customizing a new loan repayment plan that fits each individual client’s financial needs and goals. Following Financial Preparation Services will keep you up to date on just how you can get in contact and restart your loan repayment journey today.

Financial Preparation Services: What They Do?

Financial Preparation Services is in the loan-repayment industry for their clients. They are a private company that has nothing to do with the government, loan-service providers, or the Department of Education. After one of their loan-repayment specialists assesses your loan and financial situation, they will determine which, if any, government programs you are eligible for. With the government passing laws on loan consolidation and forgiveness, there are likely numerous options available for clients they are unaware of. Enlisting the help of loan-repayment company like Financial Preparation Services ensures that you are getting the best of all programs available to you. There are even loan forgiveness programs that you might be qualified for, and the Financial Preparation Services team will determine whether or not this is an option for you.

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Your financial situation, goals, and debt will be analyzed to find out what kind of repayment schedule best suits you. Your repayment schedule will be simplified so you can easily make your payments at the same time every period and still maintain a decent lifestyle and standard of living while doing so. The Financial Preparation Services team wants you get out of debt, but they don’t want you to be broke and unable to enjoy life while doing so, and that is why their speciality is helping their clients implement a 100-percent customizable loan repayment plan that suits each and every client’s unique needs and goals.

Step-By-Step Assistance

From the moment you put a call in to Financial Preparation Services, you will work with an individual how is abreast of all government loan-repayment assistance programs and laws and whom will work with you right up until your new repayment schedule is working for you. Their services include an in-depth financial assessment, document preparation, and yearly recertification.

Also Read How to fill out - IRS Form 8941

If you are struggling under the weight of crippling student debt and are wondering if there is an easier way, there is. Companies like Financial Preparation Services can take a lot of the stress out of repaying your student loan. They can customize a plan for you and take over the confusing paperwork to ensure no pertinent deadlines or information is missed that could cost you money in late-payment fees. Do yourself a favour and call Financial Preparation Services today to get your debt repayment started off on the right foot.

What is IRS Form 4562? Depreciation and Amortization Definition

IRS Form 4562 is used for filing tax returns, it’s an amortization and depreciation form. 

Depreciation refers to the calculated loss of an asset though its working life span. 

Amortization refers to an expensive purchase whose costs must be spread out over a number of years to lessen the impact on a company’s profit for the tax year it was purchased. 

Do I need to file the IRS Form 4562?

You may need to file the form 4562 depreciation and amortization form for the purchase of the following for your business:

• Vehicles
• Renovations
• Patents
• Manufacturing equipment
• Intellectual Property
• Specified Plants
• Office equipment including computer hardware and software
• Office furniture, fixtures and carpet
• Real estate (buildings, excluding land. Land does not decrease in value)

The form can also be used for expenses related to films, television and live theatrical productions. Whether the purchase was made in full or financed, it wouldn't matter for the purpose of amortization and depreciation. 

Also Read About - IRS Form 1099

How do you calculate Depreciation?

To calculate depreciation, subtract the asset’s salvage value from that of the cost to determine the amount of depreciation. Divide this amount with the number of asset’s useful lifespan. Now, divide it by 12 to get the monthly depreciation for the asset. 

Depreciation refers to the value of a business asset over its useful life. 

Following is the information you may need to calculate depreciation:

• The useful life of the asset:

This information is available in the form of a table based on the type of asset. For the value of a specific asset, you will require an accountant to tell you the useful life of an asset. 

• Minus the salvage value:

You need to minus the salvage value of the asset at the end of its useful life. Just like the useful life, salvage value is determined by the table. 

• Divided by the cost of the asset:

This includes all costs to acquire assets such as transportation cost, setting up and training. 

All this will result in the book value of the asset. 

For instance, the annual depreciation on machinery with a useful life of 10 years, a salvage value of $1000 and a cost of $1,00000 is $9900 (1,00000 - $1000)/ 10 

The asset must be placed in service in the first year that depreciation is calculated, for accounting and tax purposes. 

For assets purchased in the middle of the year, the annual depreciation expense is divided by the number of months in that year since the purchase. 

What is bonus depreciation?

Bonus depreciation is a method of accelerated depreciation. With the introduction of Tax Cuts and Job Act in 2018, businesses can now deduct the expense of qualified property at 100% of the purchase price in the year it was purchased. This instead of amortizing the asset cost over a number of years. The annual limits of these types of deductions have also increased to %100,0000 from $500,000. 

Although the 100% bonus depreciation does not apply to vehicles, these bonus limits have also increased. A company taking an advantage of bonus depreciation will increase the company's total expense in the year the purchase was made, reducing its total income by shrinking its profits, the 100% deduction will phase out. Bonus depreciation is optional.

Suggested Reads – What is IRS Form 8941?

Should I take Bonus Depreciation or Section 179?

Section 179 is a part of the IRS tax code that allows a business to deduct the full purchase price of qualifying expenses in the year it was purchased. It is similar to Bonus Depreciation. It has different limits. While Section 179 can take a company’s income down to zero, bonus depreciation can show a loss in its books. 

Typically, companies would consider taking Section 179 first, then bonus depreciation if applicable.

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