Business owners are many times confused about which accounting system to choose or what is the major difference between cash and accrual basis accounting. There are many reasons to be considered before deciding which accounting system or method to prefer or implement in your organization. The below article provides you with a detailed procedure adopted under each accounting system, its differences and benefits. The article also provides detailed steps and process to shift from one accounting system to another. Find out more which accounting method is best for your business.
Cash Accounting System
Cash accounting, also known as cash-basis accounting is an accounting method where all the records income and expenses are recorded only if there are a cash inflow and outflow.
Under this system of accounting, the receipts (income) are recorded in the books only once the amount is actually received and expenses are recorded in the only when cash is actually paid out. The cash accounting system is basically adopted by small businesses because it is simpler and more straightforward. This accounting system provides a clear picture of how much of the company’s money is spent and received and what amount of cash is currently the company has on hand.
The cash accounting system is basically adopted by small businesses because it is simpler and more straightforward. This accounting system provides a clear picture of how much of the company’s money is spent and received and what amount of cash is currently the company has on hand.
The major disadvantage of cash accounting system is that many times the books of accounts don’t necessarily provide a complete picture of the company’s asset and liability.
As the company only records only cash transaction under this account system many times the amounts outstanding to be paid or received are not recorded properly making it difficult to get a complete picture of company’s financial position.
Accrual basis accounting System:
Accrual accounting is an accounting method wherein all expenses and income are recorded irrespective cash is paid or not. Under this accounting system, all economic events are recognized and recorded at the time in which the transaction occurs rather than when payment is made (or received).
This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company’s current financial condition. This accounting system helps you to measures the performance and position of a company by recognizing economic events (past-present and future) regardless of when cash transactions occur.
This system of accounting arose out of the need of changing and expanding business needs. In nowadays times there are so many credit (credit transaction simply means transaction without cash based on present events but payment would be paid or received on the later date) buys and sales.
Therefore, it makes sense that every such event should also be reflected in the financial statements during the same reporting period that these transactions occur to provide a correct and more realistic financial picture of the company.
The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. The cash method records all transaction based on actual the cash inflow and outflow whereas accrual accounting system records all transaction based on the event of transaction irrespective whether cash is paid or received.
Which Accounting system to apply in your company?
The Internal Revenue Service (IRS)provides an option for a business organization to choose either the accrual accounting method or the cash accounting method to track and report their financial data. Business owners also have the option of using a combination of both accounting systems. The only point is that you must continue to use the same method which was opted the first time.
As per U.S. Code: Title 26 – Subtitle A – Chapter 1 – Subchapter E (Part II) Subpart A – Section 448 states,
Except as otherwise provided in this section, in the case of a—
(1) C corporation,
(2) the partnership which has a C corporation as a partner, or
(3) tax shelter,
taxable income shall not be computed under the cash receipts and disbursements method of accounting.
Exceptions to above rule are as below:
- Farming business: Farming business is defined as the trade or business of farming (within the meaning of section 263A(e)(4)).
- Qualified personal service corporations: Qualified personal service corporation is defined as any corporation whose core are activities that involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
- Entities whose gross total receipts for the year is not more than $10,000,000 (In 2002, Revenue Procedure 2002-28 by the IRS extended the use of the cash method of accounting to certain qualifying small businesses with average annual revenues of between $1million and $10 million. in the previous year.)
- If the entity was not in existence for the entire 3-year period
How can you change from cash to accrual basis accounting?
If a company or individual entrepreneur wants to change their accounting system from the accrual to the cash method of accounting: this change would require a section 481(a) adjustment.
Under the said adjustment, the person must reflect the resulting increases and decreases in the account balances of accounts receivable, accounts payable, and inventory due to the shift of accounting system.
The report of all the adjustment and changes are to be prepared and submitted so as to prevent any duplication or omission of income and expense items.
A negative section 481(a) adjustment decreases taxable income and would be reported in the year of change. A positive section 481(a) adjustment increases taxable income and is generally spread over four years; however, if the positive adjustment is less than $25,000, the company is allowed to recognize the entire amount in the year of change
The company or individual who is opting to change the accounting system then the person need to submit Form 3115 to IRS.
The company or individual who is opting to change the accounting system then the person need to submit Form 3115 to IRS.
You can view the form in the below link.
How to file the Form 3115 return?
The Form 3115 must be filed in duplicate for an automatic accounting method change request.
- The original Form 3115 must be attached to the federal income tax return for the year of the change, including extensions.
- Another copy of Form 3115 must also be filed with the IRS National Office within the period of the first day of the year of the change and when the original is filed with the federal income tax return for the year of change.Note: In general, a filer if fails to submit Form 3115 within the prescribed timing then he would not be granted an extension of time to file the form except only if unusual and compelling circumstances persist.
Addresses, where the copy needs to be sent, are as below:
|Mode of form filed
|A non-automatic change request
||An automatic change request (Form 3115 copy)
|Delivery by mail
||Internal Revenue Service
||Internal Revenue Service
||201 West Rivercenter Blvd.
|P.O. Box 7604
||PIN Team Mail Stop 97
|Benjamin Franklin Station
||Covington, KY 41011-1424
|Washington, DC 20044
|Delivery by private delivery service
||Internal Revenue Service
||Internal Revenue Service
||201 West Rivercenter Blvd.
||PIN Team Mail Stop 97
|1111 Constitution Ave., NW
||Covington, KY 41011-1424
|Washington, DC 20224
Below are a few points to be kept in mind while filing the form-3115.
- When filing Form 3115, you must check whether IRS has issued any newly published guidance which includes revenue procedures, revenue rulings, notices, regulations, or other relevant guidance in the Internal Revenue Bulletin. Please visit irs.gov for all the latest news and updates of the form.
- Unless otherwise provided in published guidance, you must file under the automatic change procedures if you are eligible to request consent to make a change in your method of accounting under the automatic change procedures for the requested year of change. In case you are not permitted to submit an automatic request you can file under the non-automatic change procedures.(Please refer the eligibility and applicability of automatic and non-automatic forms visit irs.gov )
- On a general basis, separate Form 3115 is required to be filed for each change in method of accounting. However, in some cases, you can be permitted to submit single Form 3115 for particular concurrent changes in method of accounting.
- You can refer the below links for information and further instruction file and submit Form 3115 correctly.
Revenue Procedures (Rev. Proc.) :
Rev. Proc. 2016-1 – This Rev. Proc. provides specific and additional procedures for requesting a change in method of accounting.
Rev. Proc. 2015-13 -This Rev. Proc. provides the automatic and non-automatic method change procedures which requires consent of the Commissioner to change a method of accounting.
Rev. Proc. 2015-14- This Rev. Proc. contains a list of accounting method changes that may be eligible to file under the automatic method change procedures.
Rev. Proc. 2015-20 : This Rev. Proc. provides eligibility criteria of the small business taxpayer to make certain tangible property changes without filing Form 3115.
While changing the accounting system in your book keeping software the below points are to be noted and followed:
Changing the accounting method at the start of the fiscal year involves the less complicated procedures as compared to changes made in the middle of the year. All the changes required in the expense and income amounts and data must be compensated by manual journal entry to match the system of accounting chosen by the individual.
The below are the generic steps to be adopted in case there are changes from cash to accrual basis accounting method:
- Add accrued expenses: Shifting from cash to accrual means, all expenses of which the company have received the benefit but the amount has not been paid (accrued expense) must be recorded. This means you should accrue for virtually all types of expenses, such as wages earned but unpaid, direct materials received but unpaid, office supplies received but unpaid, etc.
- Subtract cash payments: Subtract cash expenditures made for expenses that should have been recorded in the preceding accounting period. This also means reducing the beginning retained earnings balance, thereby incorporating these expenses into the earlier reporting period.
- Add prepaid expenses: Some cash payments may relate to assets that have not yet been consumed, such as rent deposits. Review expenditures made during the accounting period to see if there are any prepaid expenses, and move the unused portion of these items into an asset account. If you choose to do the same for expenditures made in prior periods, adjust the beginning retained earnings balance to remove the expenses that are now being shifted into a prepaid expenses asset account.
- Add accounts receivable: Record accounts receivable and sales for all billings issued to customers and for which no cash has yet been received from them.
- Subtract cash receipts: Some sales originating in a prior period may have been recorded within the current accounting period based on the receipt of cash in that period. If so, reverse the sale transaction and record it instead as a sale and account receivable in the preceding period. This will require an adjustment to the beginning retained earnings account.
- Subtract customer prepayments: Customers may have paid in advance for their orders, which would have been recorded as sales under the cash basis of accounting. You should instead record them as short-term liabilities until such time as the company has shipped the related goods or provided the indicated services.
Note: In case the individual has opted for conversion from accrual to cash accounting method. Then the above steps would be adopted in reverse.
How to change the accounting method in Quickbooks
The below is a step-by-step procedure in order to change accounting method in Quickbooks software:
1. Click the Gear icon and choose Company Settings (or Account and Settings depending on what you see).
2. Click Company (if you accessed this menu through Account and Settings, click Advanced) from the left menu.
3. Click the Accounting method section.
4. From the drop down, choose the accounting method to which you’d like your reports to default, and then click Save.
5. Click done.
Note: You can keep overall accounting method for reporting unchanged, but experiment with changing the accounting method only on an individual report here and there to see the difference that change makes in your reporting.
The procedure to change the accounting method for preparing report are as below:
1. Click Reports to open the Report List page and select the report you’d like to view.
2. At the top, click the Customize button.
3. In the new window that opens, go to the General section and then note the Accounting Method selected.
4. You can click to select a new accounting method.
5. Make any other necessary customizations and click Run Report.
How to change the accounting method in Xero:
The below are the steps to be adopted to change the accounting method in Xero accounting software:
- Login to your Xero account. Select “Setup”, then select “Business Information” and click on the button “BAS info”.By doing the above step you will find whether the company was setup as reporting on a cash or accrual basis and this is how it will be treated in the conversion.
Please change the accounting method option here and save the changes
Also to change the accounting method and requisite reports setting: Select “Edit”-“Preferences” and click on the button “Tax” and “Reports & Graphs”. You will find whether the company was setup as reporting on a cash or accrual basis.Please change the accounting method option here and save the changes
How to change the accounting method in LexisNexis
Please find the attached PDF for your reference. The attached PDF provides the details of steps to be adopted in case of change of accounting method in the accounting software.
How to change the accounting method in Wave
Wave software scrapped the policy for conversion from cash to accrual accounting method in October 2014 and since then the software doesn’t allow its user to edit the accounting system.
But if you want to change the accounting system, you can surely connect with the technical support authorities of the software provider.
How to change the accounting method in Peachtree
The Peachtree accounting software does not provide an option to change the Accounting Method for the company once it has been created. Thus in case you need to change the accounting method in the middle of the company life cycle, they can follow the below steps:
- Select HELP
- Search on Rebuilding a Company for more information.
When you are deciding the accounting software to be adopted in your organization all the above points are to be considered and discussed. As nowadays many of the other software has ceased to provide their users with an option to switch the accounting method in the middle of the company life cycle. And more and more software is promoting the idea of accrual accounting system. Accrual accounting is preferable as it provides a complete picture of the financial status of the company along with cash inflow and outflow details.
Looking for the right strategy to sell services online? Follow these 10 steps to sell services online and expand your business.
Winning strategy to sell services online :
Select your target customer:
Many people think that selling online is easy. It is not. I am not trying to disappoint you. I am trying to save you from the mistakes many online entrepreneurs do make. Online business is more than a few clicks. The key to success in online business is choosing your target customer and reaching out to them first. You can expand your business anytime.
“The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.”
Decide your set of services:
Once you choose your ideal customer, write down all the services you want to provide online. You may want to advertise your business online to local customers only. On the other hand, you may go global and sell out of your country. The choice is yours. I recommend that you focus on only one service first and then move to other services once you get a sizable client base. Choose the most profitable service and stick to it. This is crucial for better cash flow in the business.
Decide the right pricing for your services:
“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katharine Paine
The next step is to decide the right pricing for your customer. Do online competitors ‘ research. Remember, pricing online is sometimes cheaper than offline business as cost reduces when you sell online. Do not go too low with your pricing, as your customers may assume that you offer low-quality services. Consider the value you offer your customers in exchange for their money. Suppose you are PPC marketer. You might consider charging a high price for per hour involvement, as benefits from PPC marketing are tremendous.
Pricing can be divided into 2-3 tiers and should be tested periodically. Read this post from Conversionxl about the different type of pricing and its effect on the conversion of customers.
People take the time to trust your brand online, so try to sell a small package to them first. Later, they will happily purchase a more costly package from you. People are not hesitating to buy $99 packages than $499. Do not price yourself too high compared to your competition unless you have the solid reason for doing so.
Choose right online platform:
The sad thing is that there are very few options for selling your services online. Services are different than goods. You cannot upload photos of your services and encourage shoppers to add them to their cart.
I recommend WordPress for setting up your site, as you can do it yourself or hire someone else. You can get prepared a great landing page by spending $200-$500. Let your client contact you via an inquiry form. After receiving the full details of your prospective client’s requirements, you can provide a quote that outlines the pricing for your services, and can collect payment via wire transfer or credit card.
Regarding accounting software, I suggest using Xero, as it accepts stripe, credit card, PayPal and other popular payment options while also enabling you to issue repeating invoices each month. If you are new to Xero, try Xero here.
Choose the right client communication platform:
I have conducted extensive research into the best CRM/ Client communication platforms, and have found a number of suitable options. However, I suggest Flock for service providers who are just starting out. By building a team, you can communicate with your clients while exchanging files. Flock is also a team collaboration tool, which you can use on PC or mobile devices. Flock can also be integrated with popular apps and your mailbox. At just $3 per user per month, Flock offers affordable pricing and a great option for those who are just starting out and don’t want to invest too heavily on CRM. Check out all of Flock’s options here .
Choose the right online marketing strategy:
Once you’ve set everything up, you need to have a good online marketing strategy. Read Wordstream’s post about online marketing strategy. If you are the solo entrepreneur and are on a limited budget, focus on one or two marketing sources online. You can’t be everywhere, right? I recommend going with paid advertising first. Adwords is the best option for it. Social media is also good. SEO is slow but effective in the long run. You can use one or more than one online marketing option.
You can also hire someone from an outside agency to market your business online. This service generally costs you $500-$5000 per month.
You can also hire an agency to market your business online. This service generally costs you $500-$5000 per month. Remember that online marketing takes time. So be patient.
The important thing is that you should set quarterly and yearly goals and set reasonable expectations. Be clear about what you want before you hire someone. It takes around 1 to 3 years to get success in online business, so don’t lose hope early.
Get your first customer online:
Your first goal should be to get the first online customer. This is not only vital for your business success but also required to fuel your motivation. Try to provide the best service to the client and do not forget to ask for a review. Do not be shy. Ask him to recommend your service to friends and families. Request him to give a short review about your service and use this as the testimonial on your website.
Provide high-quality service:
No matter how attractive your website is, you’ll lose the customer if you do not provide high-quality service.
“Customer service is the new marketing.”
Derek Sivers, Founder CD Baby
Provide high-quality service consistently to your customers. Get their feedback and improve more and more. Do not compromise in quality ever. The service business depends on the value that you provide. People are willing to pay more if you solve their problems and improve their lives by your service.
Build brand of your company:
Try to build a solid brand for your company. Write great posts about your field and publish them. Guest posting is also a great tool to drive a good amount of people to your site. Try to help others and build a solid brand for your company. Establish yourself as an expert in industries. You can write a long resource post or white papers related to your field. A press release is also a good option, though it can be a bit costly.
“Great things in business are never done by one person. They are done by a team of people.”
Solo, we are nothing. This is true in offline and online business. Build good relations with your team and good connections with people in your industry. If you are selling to a small business, try to make a connection with small business owners and people who also sell to small business owners.
Use social media as a tool to establish your brand and make a good connection. However, be careful about using social media as it can be time-consuming. You can use a virtual assistant to set and promote social media posts. There is an awesome post on social media marketing by Neil Patel. Read it here.
Once you have enough clients, it is time to expand your business. You can expand your business by getting more customers or by providing additional services. It depends on opportunities available for you. I recommend building your brand on one service and adding additional services gradually. The expansion also requires more resources. You need staff, funding for marketing and other expenses. You can get funding from angel investors or a bank. Before planning for expansion, you should establish a strong system for your business so that it can sustain the expansion.
Create a system:
If you have read the book Emyth, you surely know what I am talking about. The creating of a system for any business is important in the first place. To create the system, build an organisational chart, decide various positions and create systems and processes for each position. This is a time-consuming process but it helps a lot. It guarantees your customer unique business performance every time which helps you to outrank your competition. Read more about creating the system on Emyth’s blog.
Internet gives us enormous opportunity to grow our business. Using the right strategy, we can certainly crack the code. By focusing on only a few online marketing options, you can save time, optimize cost, build your brand, and increase the number of customers. What is your ideal strategy to sell services online? Please share your thoughts by commenting below.
Accounting has two methods: Accrual vs cash accounting. Both have a different effect on taxes and business. Before learning more about accounting method, please consider following facts about choosing and implementing accounting method in your business:
- It is wise to choose accounting method before filing your first tax return.
- You can choose a different accounting method for your business and personal items. You may account your personal items on a cash basis and business items on an accrual basis.
- If you have two separate business, you can choose different methods for both businesses. You should maintain separate books of accounts for both businesses. There should not be the intention of tax evasion in implementing different accounting methods.
Cash accounting method:
Cash accounting is useful for small business owners or when most of the transactions on a cash basis. Transactions are recorded when there is cash movement in business.
Individuals and small business owners choose this method of accounting. You are only required to keep an eye on cash movement. So it is quite simple.
Who can choose cash accounting method?
Not every business is allowed to maintain an account on cash basis. Following entities cannot choose cash accounting:
- Corporation ( other than s corp) having average annual gross receipts exceeding $5 million dollars.
- A partnership with a corporation, having average annual gross receipts exceeding $5 million dollars.
- Tax shelter
- You do not produce, purchase or sell merchandise and not required to keep inventory.
How to calculate gross receipt?
Gross receipt can be computed with following formula:
(Gross receipt of tax year + Gross receipt of previous two years ) / 3
Shift to accrual accounting:
When any business fails above test and its turnover exceeds the limit, the business should adopt the accrual accounting from the tax year when it fails the test.
Now, Let’s understand accounting using the cash method.
You should record cash receipts as income. Cash receipt includes actual receipts and constructive receipts. Cash receipts when you receive money in your hand. Constructive receipts mean amount credited to your bank account or available for you without restriction. IRS suggests you should include constructive receipt and actual receipts while filing your taxes.
You can claim expense paid via cash or bank as deductions. However, expense paid in advance cannot be deducted in the current year. The amount should be capitalised. However, you can use 12-month rule in certain cases.
Expense paid in advance and 12 month rule:
You are required to follow 12-month rule when you pay some expense in advance and benefit of expense does not extend beyond the earlier of following:
- 12 month from the date of benefit begins
- Last date of the tax year after the tax year when payment is made.
As per 12 month rule, you can deduct 100% amount in the year of payment of expense.
- Alex pays $15000 as advertising expense on 28 February 2016. His tax year is the calendar year. The benefit of advertising extends up to 31 January 2017. In above case, Alex can claim $15000 as an expense as 12-month rule applies.
- In above case, if benefit extends up to 30 April 2017, Alex can claim $12000 as an advertising expense for 2016 and $3000 for 2017 tax year.
Accrual accounting is the most reliable method of accounting. It shows you the true picture of profitability of business. Under accrual accounting, income is reported when it is earned and related expense should be deducted from the income. There are certain rules under US taxes about accrual method.
Let’s understand how to treat transactions as per US laws using accrual accounting.
Treatment of income:
In this method, transactions have been recorded on the earliest of the following:
- when payment is received by you.
- When invoice is due
- When title passes
- When you earn the income.
When you cannot decide income accurately, you can report estimated income and difference in estimation can be reported in next year.
Treatment of advance received for services:
You should treat an advance as income in the year you receive the payment. However, using deferral rule, you can report this income in next tax year.
Advance received for sales:
The advance should be treated as income. However, you can choose an alternative method of reporting:
Alternative reporting method:
You should include advance payment in the earlier tax year
- The year when you report advance as income while preparing accounts for tax purpose
- The Year when you report advance as income while preparing accounts for financial reporting.
There is some exception to above rule for inventory goods.
Please note that you should attach following statements while following alternative reporting method:
- Total advance received
- Total advance received in earlier tax years and not reported before current tax year.
- Total advance received in earlier tax years included in income for the current tax year.
Ben is following calendar year as tax year.Ben is following accrual accounting method. Following transactions are recorded during December month.
- Ben sold $1200 goods to Ken on credit basis on 1st December 2016. Ben has received the due on 1st February 2017.
- Ben sold $1500 goods to Alex on 22nd December 2016 and received $1500 on the same day.
- Ben has received $2200 advance for future sale on 21st December 2016.
- In accrual accounting, the transaction is important. There is valid sale transaction in December month. It does not matter whether he receives money or not. So he should record $1200 sale in December month.
- He should record sale $1500 in December.
- Ben should record $2200 as income in the tax year, 2016.
There are two options to treat expense as per accrual accounting:
- Deduct in current year
- Capitalize it and deduct in future tax year/ years.
The expense should pass all-events test and economic performance should have occurred.
Let’s understand how we should treat various expense following US tax laws.
- Workers’ Compensation should be deducted when payment has been made.
- Taxes should be deducted when paid. However, you can treat taxes as recurring items and deduct estimated taxes for the year.
- Interest should be deducted in the year of payment.
- Wages/salaries to employees can be deducted in the year when employees render services to the company.
- Vacation pay can be deducted in the same year when an employee takes a vacation. You should pay this amount not later than 2.5 months after the end of the tax year.
- Other liabilities such as the penalty for violation of laws, refunds, rebates, the warranty should be deducted in the year of payment.
The concept of recurring items:
Using this concept, you are allowed to treat certain items incurred in tax year though economic performance has not occurred. The following conditions should be met to use this exception:
- The all events test is met.
- Items are not material or using recurring item concept, the expense match revenue in a better way following GAAP principle.
- The items are recurring in nature and you follow all events test for these items.
- Economic performance occurs by earlier of the following: the date of return filing or 8.5 months after the close of the tax year.
Examples of recurring items:
- Stationary purchase
- Monthly subscription
- Telephone expenses
Expenses paid in advance:
Expense paid in advance should be deducted in the year to which it applies. You can use 12-month rule for advance paid. 12-month rule has been discussed earlier in this article.
You are required to follow accrual accounting method when you are required to account for inventory. You can account inventory using GAAP principles and IRS rules for valuing inventory.
We understand how both accounting method work. Let’s understand pro and cons of cash and accrual accounting.
Accrual vs Cash accounting – Advantages and disadvantages
Easy to understand: Cash accounting is really very easy to understand. No accounting background is necessary to record the transaction. There is less chance of error as you are only giving effect as per cash movement.
Easy to implement: As mentioned before, you are not required to hire an accountant to implement accurate accounting. You can do your own accounting without learning A-B-C of accounting principles.
Best fit for tiny business:
When turnover is very small and most of the transactions are in cash, this method is suitable. However, with the growth of the business, one day you need to move from cash to accrual accounting and switching may be a headache.
- Inaccurate Reporting: The biggest disadvantage of cash accounting is wrong reporting of business. Your profit and loss account does not show the real profit. Which affects your business decision.
- switching from cash to accrual accounting: You need to follow the long procedure to switch from cash to accrual accounting. If you have already adopted any accounting method and filed your tax return, you are required to get IRS permission before switching accounting method.
- Used by most of the businesses: Accrual accounting is being used by most of the businesses. So it is wise to follow the same policy in your business.
- Comparision: You can compare your financial results with other companies as the method of accounting is same.
- Reliable: You can rely on the report prepared as per accrual accounting. Accrual accounting shows a true profit for any given period of time. It also shows true position of business via balance sheet.
- No need to switch: The other benefit of accrual accounting is no worries to switch from cash accounting to accrual accounting. Your accounting base is already strong if you start using accrual accounting from the first day of business.
- Difficult to understand: There are many accounting terms and treatment you need to understand to use accrual accounting. You are required to follow all principles of accrual accounting to get the true result of business. If you miss one rule, there might be the wrong number with you.
- Costly: You should hire the qualified or semi qualified person to manage your accounts. Doing billing entries is an easy task but putting all numbers together and producing accurate result requires skill.
Switching from cash to accrual method or vice versa:
You can switch your accounting method before filing the first return without IRS approval. However, you need to get IRS approval afterwards. You are required to file form 3115 for it.
Changing accounting method is not easy. You are required to fulfil all the conditions for it. That’s why it is wise to choose best accounting method from the beginning of the business. Which accounting method do you follow? Share your experience about it via comment box.
Financial planning is a massive task which involves determining how a business will achieve its strategic goals and objectives. On a general basis, a company’s Financial Plan reflects the vision and mission of the company.
Financial planning for every business is very important as these plans helps the entrepreneur to convert the monetary funds to profitability, liquidity and stability for organisations. While Business planning one must use the technique of benchmarking and comparing the financial plan of the company to similar organisations.
A financial plan involves the below elements to it:
- Cash flow study and projections
- Profitability statement
- Variance analysis and changing the budget.
The major benefit of financial planning is that the plan helps the company see the big picture and set long and short-term life goals. A financial plan is a crucial step in mapping out the company’s financial future. When a company has a plan then it’s always easier to make financial decisions and stay on track to meet the goals.
Business planning involves a complete process circle from:
Step 1: Procurement of funds
Step 2: Planning of utilisation of fund
Step 3: Studying and analysing the difference (variance) between planned and actuals
Step 4: Changing (Revamping) the plans for future
How to do Financial Planning for small business
Step 1: Procurement of Finance as per needs:
A company needs monetary funds to establish and grow in the market. Finance or monetary fund forms the base of every business organisation. There are many ways a company can collect funds by following ways:
- Equity financing: On a general basis small businesses’ equity comes from the owner or from his or her family savings and is the only source of funds for start–up small businesses.
- Debt financing: These funds are borrowed funds that are paid back. The cost of debt financing is interest paid to the lender.
Points to remember for small business financing:
- Invest your own money
- Attract Investors: To obtain others’ investment one need to demonstrate the ability to manage a profitable business and ensure the return of funds.
- Understand and retain working capital: Every business owners must be aware of growing need of working capital to sustain their businesses.
- Understand risks and costs for loan types: Each type of loan carries associated risks and costs. Thus the entrepreneur must understand each option and risk of such funds.
- Always look around for better and more suited option for investors or loan or both.
- It’s always better to have a balanced combination of self-investment and Loan funds. Thus it’s better to seek expert advice to devise better-suited investment plan based on the business structure and individual capabilities.
Step 2: Planning of utilisation of fund
Funds are the basic requirement for setting up business and also for its growth and expansion. Thus planning of the utilisation of the procured fund is very vital for the success of the business.
The below points are to be kept in my mind while devising a business plan for optimum utilisation of funds:
- Have a Short-Medium-Long term goal:
Short-term goals are the business goals which are to be accomplished within one year to 18-month timeframe. These goals are important for the survival of the company.
Medium term goals are generally focused on growth and survival of the company. These plans mainly range for a period of 5 years.
Long term goals are the targets set for 10 years and are more to do with the mission of the company.
All financial decisions must be taken considering these plans and their planned executions and targets.
Apart from planning the timely and efficient execution of the planned process is very much important. Thus the entrepreneur must collect a great team which can accomplish the planned series of activity and achieve the desired results.
Step 3: Studying and analysing the difference (variance) between planned and actuals
After planning and execution of planned activity there comes the actual output. If the planned target is meeting the actuals then nothing like it. But if there is gap or variance in between planned and actual the same needs to be deeply analysed and studied to avoid future contingencies or losses.
Thus Variance report must provide cause and effect details on each gap or variance point. The report’s main focus should be on the causes of such variance and pain points during execution. These reports are to be prepared and documented. This report forms an essential document for future planning and also provides in-depth insights on the current problem.
Step 4: Changing (Revamping) the plans for future
After all the reports and analysis, there should a plan devised to cover the gap and ensure 100% output achievement. There should be many control mechanism and check installed at every implementation stage to avoid any future leakage. The new financial plan devised must be prepared after taking into account all misses of last plan and also incorporate any future foreseeable dips. This new plan would be the plan then put to execution.
Thus this cycle of preparation of financial plans, its execution and then variance analysis and re-planning continues throughout the life-cycle of the company. This financial planning cycle is very crucial for the success of the company and thus needs to be taken very seriously.
In earlier times a large number of experts were hired for preparation and delivery of these financial plans. The whole financial planning process and hiring a panel of experts for the same was very expensive for a small upcoming company.
But nowadays there are many online software which can help an organisation to build financial plans based on the requirement and design of the organisation. This software works on the requirement inputs provided by the company. The online software’s which are available in the market are comparatively cost effective. This software can be customised as per company needs and thus provides a very flexible and user-friendly solution to the companies.
Financial planning software:
The below is the list of few online software which can help to strategize and chalk out a financial plan.
- SAP (Financial Planning and Analysis (FP&A):
This software module helps accelerate planning cycles and make decisions based on real-time financial insights using FP&A software from SAP. SAP solutions support strategic planning, budgeting, forecasting, financial analysis, enterprise performance management (EPM), and more. This can form an end-to-end financial planning solution for any organisation.
FinPal is a complete financial planning management solution that can be deployed quickly to provide instant benefits to any planning practice. The software helps to leverage the power of Microsoft’s cloud-based services. The software is scalable, reliable and integrates seamlessly with Outlook and other Office software. There are also many built-in features which help meet business needs. Also, the software can be customised which in turn can help the organisation with flexibility.
Money Tree Software provides professional financial planning software which helps an entrepreneur to devise and deliver the best financial planning. The company also offers a free trial period offer for 30-days.
- MoneyGuidePro :
MoneyGuidePro is a client-centered web-based Financial Planning Software. The said software helps build fast and easy Goal Planning for a company. The software company provides training solution in their package.
Financial planning being a crucial tax for company’s success, a company must make a decision of either choosing an online software for building a plan or hiring a panel of experts for preparation of financial plan must be taken as per the capability and requirement of the company. There are many other online options available in the market apart from the list attached above. The entrepreneur needs to identify the best-suited option in between software based plan or expert panel discussions as suited for his or her need.How do you do financial planning? Let me know via Comments.
Creating small business budget is an important task to track income and expense and compare the result with actual. You can create the budget in xero via budget manager or go with excel sheet.
If You are using Excel, you are required to set up formulas to give increase and decrease effect. With Xero, you can create a budget without any calculation. You can create the budget for your business and compare it with actual data using Xero Reporting features.
How to create budget in Xero :
There are two ways to create budget in Xero:
- Importing data
Let’s have a look at both options:
#1: Creating the budget manually using Xero Budget Manager:
You can create multiple budgets in Xero with or without tracking categories. Follow steps below to prepare the budget in Xero:
- Go to Reports < All reports < Budget manager. ( You can find budget manager under Financial category in reports).Here, you can find option Create New Budget. ( See screenshot below).
- Name the budget and tracking category. Choose none if you do not want to prepare budget category wise. You have option to choose the first month of the budget. You can also see actual figure for past months to get reference while creating budget. Choose none if you do not want to see past data.You can create 3 month, 6 months, 12 months and 24-month budget using Xero. Once all things are set, click on update
- Enter budgeted income and expense amounts in blue coloured boxes for one month.
- When you click on any row or month heading, you can see green arrow. When you click on the green arrow, you can see pop out to set adjustment for a whole month or specific row.
- Click on the green colour arrow ( See screenshot below) and you can see following pop out.
- You can see four options:
- The first option will erase all data from specific month, ( When you click on green arrow near month name)
- the second option will copy all data for the month and paste it to all remaining months. You can use this option when you want the same amount for all months.
- The third option will give you the option to adjust by amount. Suppose you put sales as $10000 in April month and adjust by amount as $1000. Your budgeted sales will be $11000 for May month, $12000 for June month and so on.
- The fourth option will give you option adjust by percentage. In this case, your budgeted amount will change by a percentage each month. Suppose you put sales as $10000 in April month and adjust by percentage as 2%. Your budgeted sales will be $10200 for May month, $10404 for June month and so on.
- What if you want to give decline effect? Just put “-” sign while setting adjustments.
#2: Import budget template in Xero:
Another method to create budget in Xero is by importing budget sheet in Xero.
- Go to Budget Manager
- Click on import at the bottom of the page.
- You will be redirected to the following screen.
- Download Xero template.
- You can see various accounts with blank rows. Fill budgeted figure in rows. If you do not want any account to be budgeted, leave it blank.
- Save the file in CSV format and import in Xero.
Generally, I prefer the first option to create the budget in Xero for my clients. It is easier and fast option. You can export budget file in excel, google sheet or CSV format. You can unlimited budgets in Xero as per your requirement. Budget ( Excluding overall budget) can be deleted via delete button on left corner if you do not need in future.
How to analyse Xero Budget via Xero Reports:
#1: Xero budget variance report: comparison with actual data:
The main use of budget compares the budgeted numbers with actual numbers. This can help in cost cutting and track the progress in business. Xero fulfils this requirement via Xero Budget variance report. Follow steps below to view and analyse budget in xero.
- To see budget variance and compare actual data with budgeted data, go to Reports < All Reports < Budget Variance. ( In financial section).
- Here, you can check various report.
- To see variance, go to current format < Actual vs overall budget.
- Here, you can see 8 – columns- Actual monthly data, budgeted monthly data, variance in amount, variance in %, yearly data, yearly budgeted data, yearly variance in amount, variance in amount.
- You can create the new layout by clicking the button Layout options at the bottom menu. Here, you can move different accounts or create different groups for accounts and present this variance report in the new layout. You can anytime edit this layout, set as the favourite or delete it.
#2: Budget summary report:
You can view budget summary for any period using budget summary report in Xero. Take steps below to use budget summary report:
- Go to reports < All reports < Budget summary in financial section.
- If you set budget as per tracking category, you can view budgets category wise. Otherwise, you can view budgets you have prepared ( without tracking category).
- Select month from which you want to see a budget summary, period ( monthly, quarterly, yearly), the number of periods.
- Xero gives you the option to add a summary of the report. To add a summary, click the button on top left.
- You can publish this report if you have adviser role.
- You can print this report or export it in excel, pdf or google sheets.
#3: Account summary report:
You can review actual and budgeted amounts for various expense and incomes via Account summary report. Take steps below to view budget variance account wise:
- Go to Reports < All reports < Account summary ( You can find this report in accounting section).
- Select account, the period for which you want to see a summary, budget you want to compare actual with. ( See screenshot above)
- You can see actual, budgeted amount and variance % column.
- Xero presents a summary in the beautiful graph for quick analysis.
- Similar to other reports, this report can be printed, published or saved.
The budget summary report is a simple report showing periodical budget. Another side budget variance report and account summary report gives you more detailed knowledge about variance or loops in implementing the budget in business. Xero is improving reporting features and giving subscribers more features. I hope we would get more from Xero Budget Manager in future. Meanwhile, you can use Xero budget add-on.
Xero budget add-on:
Every business has separate reporting requirements. If you want more reporting features, you can move on to Xero Budget Add-on. Here is the list of Xero budget add-ons:
- Floatapp: Floatapp provides you cash flow forecasting, budgeting, detailed reporting and data import and export features. Pricing stars with $49 / mo with 3 user accounts. You can get 30 days trial.
- Futrli: Futrli is similar app with extra features of business planning, KPI reporting. scenario planning. It has straight pricing – $49.99/mo with unlimited users. A trial is available with this app.
- Profitsee: If you want enhanced reporting features, profitsee is for you. It provides KPI reports, business valuation, consolidation with budgeting features. The business owner can access data and reports via mobile phone. Profitsee has very affordable prices for small business. Pricing starts with $18/mo. If you want more features, you can purchase add-ons. The trial is available with this app.
There are other add-ons available for budgeting features. You can review them all with this link and choose as per your business need.
The #1 reason for the popularity of Xero is its simplicity and user friendliness. Xero gives you easiest way to create, import, export, publish and analyse business budget. You can prepare a budget in Xero within few hours and publish the report. Have you prepared budget with Xero? Please Share your experience about Xero Budget Manager.
Want to know minimum rate for bookkeeping ? We have prepared comparison of outsourced bookkeeping rates by various agencies, CPA, freelancers in this post. Compare and choose to save the bookkeeping cost.
Outsourced bookkeeping rates- comparison:
Before we dig down into bookkeeping rates, be clear about one thing. There is difference between bookkeeping work and accounting work. You can hire two persons as bookkeeper and accountant or choose one person who handles work of bookkeeping and accounting. It depends on nature of business, complexity of work and number of transactions. Lets see what are the duties of bookkeeper and accounting.
What work does bookkeeper do or duty of bookkeeper?
There is difference between work of accountant and bookkeeper. Bookkeeper generally handles following tasks:
- Reconciliation of bank and credit card statement
- Payroll run
- Issue invoice
- Pay bills or do entry for bills
- Manage expense claims
- Supply details to management
- generate reports
- Communicate with clients/ customers
- Reconcile receivables and payable
- prepare cash flow forecast
- General data entry in inventory or payroll system.
- Preparation of common reports
On other side, accountant handles following tasks:
- Prepare reports for tax purpose and supply to CPA
- Review accounting tasks
- Reconcile factoring accounts
- Set up accounting system such as Xero, Quickbook, Wave, Freshbooks etc,
- Set up inventory system
- Integrate accounting system with ad ons as per business needs
- Pay taxes on behalf of business owner
- Preparing strong accounting system
- Advice on profitability to management
- Solve any accounting query
- Inform owner of business for tax dues
- Debtor collection
- Training to accountant
- Cash flow management
Options for bookkeeping service to small business owners:
There are 5 options for bookkeeping:
- Do your self
- Hire local bookkeeper / accountant part time/ full time
- Hire CPA firm for bookkeeping tasks
- Hire freelancer
- Hire online bookkeeping service agency
Option 1: Do your self:
As all entrepreneurs know, you live and die by your ability to prioritize. You must focus on the most important, mission-critical tasks each day and night, and then share, delegate, delay or skip the rest. – Jessica Jackley
For few years, you can tackle your bookkeeping yourself but believe me if you choose outsourcing bookkeeping from the first month of business. you can save lots of mental energy which you can invest in business growth.
I believe you should compute estimated monthly profit and divide this with estimated monthly hours invested by you. This will give you your hourly income rate. Do not invest your single hour in bookkeeping if bookkeeping hourly rate charged by third party is less than your hourly income rate. We can say this optimal use of time.
Always remember that you start business to grow and earn profit and not to learn accounting and bookkeeping tasks.
Option 2: Hire local bookkeeper ( Part time/ full time):
You have option to hire local bookkeeper. Salary of bookkeeper depends on experience, location, industry and working hours. In below table, you can see salary of local bookkeeper as per location:
||Bookkeeper monthly salary
This one can be costly option for business. Average salary for part time bookkeeper ranges from $15000-$25000. For full time, this rate can be $30000-$50000. Additionally, you are required to spend on allowances and perks. You also need office space and computer for your accountant. This will increase your office cost. Choose this option when you think face to face daily conversation is required and you really need presence of accountant in your office.
Option 3: Hire CPA firm for bookkeeping service:
Generally you get help CPA firm for tax and audit purposes. Many CPA firms get contracts for bookkeeping also. Rate of bookkeeping services by CPA firms are approx $20-$35/hour. When CPA helps you in work, he charges between $175 to $400/hour depends on type of work and experience of CPA. It is cost effective if you hire someone else as bookkeeper/ accountant and allot tax / audit work to CPA firm.
Option 4: Hire freelancer:
You can hire freelancer for your bookkeeping work. Qualified freelancer will charge you between $30-$60 per hour. It depends on your skill to hire and test freelancer. In this option, there is risk of data loss or non continuance of work. Once he left, he took all his knowledge about your business and you need to look for another bookkeeper/ accountant immediately. I am not against freelancing. It is great way to reduce cost but It is better that you hire someone who commits with your business accounting work for long time.
Option 5: Hire online bookkeeping service provider agency / company:
“Cloud computing is often far more secure than traditional computing, because companies like Google and Amazon can attract and retain cyber-security personnel of a higher quality than many governmental agencies.”
– Vivek Kundra, former federal CIO of the United States
We all aware of cloud computing.You can read benefits of using cloud accounting software here. No, face to face interaction is required for accounting work nowadays. Additionally, many people can access same data together at same time and from different places. This gives boost to online bookkeeping service.
Now, we have another option of getting bookkeeping services online by bookkeeping service provider agency / company. The bookkeeping company is team of bookkeepers, accountants and CPAs. Your all data is allocated to team and handled by qualified persons. There is also 100% data security and the company uses popular cloud accounting software such as Xero, Quickbook, wave apps, Freshbooks etc. Some agencies use only their own accounting software.
There are many online service providers agency. Average cost will be around $100- $3000 / month depends on volume, nature and complexity of work.
Finsprout is one of these agency having team of qualified and experienced bookkeepers, accountants, CPAs, CAs, MBAs. . Finsprout can help you with following bookkeeping/ accounting work:
- Set up of cloud accounting software such as Xero, Quickbook, Freshbook , wave apps
- Bank and credit card reconciliation
- Issue of invoices
- Receivable follow up
- Payment of bills
- Factoring reconciliation
- Handling accounts queries and email follow ups for third parties
- Expense claim management
- Payroll management
- Report preparation for taxes
- Collaboration with your CPA
- Other accounting matters
- Inventory system set up
- E commerce accounting
- Management reporting
- Receivable management and collection
- Accounting training
Outsourced bookkeeping rates comparison:
In table below, we have given outsourced bookkeeping rates comparison for you:
||Yes/ No/May be
||May be/ No
||May be/ NO
|Works with any software
|Long term contract
Taxes/ Tax preparation cost:
Taxes are one of the Tax preparation is task of qualified person. It is advisable that you get help of expert to file your taxes or get advice for tax saving. Local CPA or tax professional can help you with this.
As per survey by National Society of Accountant (NSA) , average cost of professional tax preparation is $261. This price included 1040 preparation with tax deductions and state tax return. Filling your own tax return is time consuming and there are chances of error or non claim of deductions in return. It is better that you hire some professional for tax preparation.
Bonus tip: Factors to be considered before hiring accountant:
As small business owner, you are required to cut costs and increase profit. If you are worried that how much accountant will cost me ? I hope this article has solved your question. Your goal should be high quality bookkeeping service with least cost.
Qualification of bookkeeper / accountant is important factor. Many believe that non – commerce person can do accounts. I am agree but he does not understand basic principles of accounting and there are chances of errors. He cannot even understand accounting reports. He can only give you what he knows. So bookkeeping should be done by commerce person having commerce graduation degrees and for accounting, you can choose master in commerce or CA, CPA, CMA.
If your accountant does not reply you within 24 hours, leave him. Timely communication is must when someone is handling your important numbers. It is not wise to hire someone as accountant on whose behalf you are answering accounting queries. Hire someone who communicate with you and with others on your behalf on regular basis.
Data security is important factor in finance. You do not want your revenues or other important things leaked. Make sure that your data is handled in secure environment and all the accounting data will be forward to you once you stop availing accounting service.
At the year end, you are required to supply all the data to your CPA for tax purpose. During the year, CPA requires data for vat or GST filling. Proper communication , cooperation and collaboration between your CPA and accountant is must. So that you can save your time by allotting tax matters to your accountant and CPA.
If you are thinking to hire bookkeeper with affordable fees and high quality service, I recommend try Finsprout for 7 days to get started. Take first small step and other things will follow. Click here to get your trial bookkeeping.
Are you setting up Xero yourself? Follow these simple 8 steps to xero set up and start using xero immediately. Lets start with first part of xero training.
Xero Training – Series 1 – How to do Xero set up first time
First thing first, I am assuming that you have already subscribed to xero. If not, you can get free Xero trial here. Once you purchase xero, first step is xero set up.
Xero is very easy in use and set up is easier compared to other popular cloud accounting softwares.
There are two ways for xero set up.
- If you are already using other accounting software, read guide here – conversion to xero.
- If you have not use any software before, you can set up Xero with following step.
Step 1: Set up organisation in xero:
- Open Your organisation.
- Go to Setting < General setting < Organisation setting.
- Organisation setting is very easy. You need to enter following :
- Line of business ( Business nature).
- Legal structure of organisation ( Proprietorship, company, llc etc)
- Business registration number
- Contact details
That’s it. It is easy, isn’t it?
Step 2: Financial settings:
Financial setting is very important while you are setting the Xero first time.
For it, go to general settings < financial settings.
- If you have not set up currency before, go to general settings < Features < Currency. Here, you can add currency as per your business needs. You should have … plan of xero for multiple currency use.
- Choose your year end date as per tax laws of your country.
- Enter sales tax number, tax id number, tax period and accounting method in 3rd step.
- You can set up tax defaults. By setting it up, you can choose whether sales will be inclusive, exclusive or without tax.
- Xero gives you lock date features so that no data can be changed before lock dates. Lock dates can be set up for users having Adviser role and users other than non adviser role. This is very important feature when your tax consultant or CPA or CA is working on tax matters.
- Last step is choose and select time zone.
- Take a look once and hit save to do further settings.
Step 3: Invoice settings:
Use following steps to do invoice settings in Xero:
- Go to General settings < Features < Invoice settings.
- First option, you can see various options such as branding of invoices, general settings, payment method, invoice reminders.
- By using branding option, you can create standard or custom look for your invoice.
- I recommend use standard theme and do necessary changes as per your business needs. Custom docs themes are useful when you have good experience of Microsoft word.
- You can customize standard theme by clicking options < Edit ( On right side).
- Here, you can change page size, margin, enter contact details, enter terms and conditions of your business and choose payment services.Once you are done, hit save.
- You can set up payment services in Xero by hitting payment services < Add payment service. All you need to do is enter select payment service and enter necessary details required by your payment service providers. You can manage theme and add different payment service for different invoice themes.
- Default settings option helps you to set up due dates for invoices and bills, numbering and prefix, option to show total outstanding amount while customer is seeing the bill.
- To set up invoice reminders, select the option and set up reminders for overdue as per your business needs. For small businesses, when cash is king, this feature is recommended and must be used.
You can learn best way to use Xero invoices by my other post.-Creating and sending invoices through xero.
Step 4: Chart of Account setting in Xero:
There are three ways to set up chart of accounts in xero:
Use xero’s Default chart of account:
Xero gives you default chart of account. There are four categories in chart of account:
Components of chart of accounts:
There are 5 components in account at chart of account.
- Name and description
- Tax rate
- Year to Date balance.
Create New account in xero:
- Go to settings < General settings < Organisation < Chart of accounts.
- Click add account.
- Select account type
- Unique number of account
- Name of account
- Short description of account
- Select applicable tax rate
- Tick on Show on dashboard wishlist you want to see this account on dashboard.
- Tick on Show in expense claims if you want this account used when claiming expense by employees.
- Tick – enable payments to this account if you want payments received to this account. Generally contra account and cash are such account.
- Once you are satisfied, click save and yes, you have created new account in xero successfully. 🙂
- You can edit this account anytime by clicking on account name.
- You can add bank account with similar method if you want to enter bank data manually.
How to enter bank account in xero and setup automatic bank feed:
- Go to chart of account < Add bank account.
- First, write your bank account name at find your bank screen. Your bank name will be displayed. Select your bank with correct region.
- Enter Account name you want to displayed in xero, account code(Unique code for chart of account purpose) and account number.
- Next step is set up automatic bank feed. For it, you need to enter your net banking login id and password and agree with terms and conditions. Click next and your bank feed importation will be started. You get confirmation notification from Xero once your bank data will be imported.
Step 5- Import a chart of account:
If you want to import your own chart of account, it is also possible with Xero. Follow steps below to import chart of accounts in Xero.
- Download example file ( Xero chart of accounts template) given on box at right side.
- Open the file. You can see sample accounts here. You can use these accounts and enter balance or you can delete all the accounts and prepare new chart of accounts by entering account one by one in same format. There are four mandatory fields in chart of accounts template : Code, name, type and tax code. Get advise of your accountant before preparing chart of accounts.
- Save the file in csv format.
- Go to Settings < General settings < Reports < Chart of accounts.Click import button. Select xero for import system. enter conversion date if you are importing balances, browse the file you prepared in csv format , select the file and click import.
- Once you imported the file, Xero gives you option to review chart of accounts. Review the chart of accounts and confirm.
Step 6- Set up account balances:
If you have not entered your account balances before, you can add it later. Follow the steps below to set up account balances in Xero:
- Conversion balances should be as on date of conversion. Date of conversion may be first date of current tax filling period or from the past date if you want to do back date accounting. Ex. Mr. Joe has business in Australia and he has purchased Xero on 21 August, 2016. In this case, the suitable date of conversion is 1st July, 2016 – First date of current tax period for Joe as per Australian accounting.
- If you are using any other accounting system before and now migrating to Xero, enter the date when you have balanced accounts and stopped using past system.
- Once you choose conversion date, you need to enter closing balance at last date of previous year. ( Balances at 1 day before conversion date- For Joe, it is 30 June, 2016).You can get this balance from trial balance.
- Go to settings < organisation < Conversion balances.
- Now, enter conversion balances one by one. This is the game of debits and credits. Enter debit balances on debit side and credit balances on credit side. If there is negative balance, enter it on opposite side in Xero.
- Please remember that the sum of debits and sum of credits should be equal. If it does not end as equal, you can do adjustments later.
- There are some special accounts which need more attention and care while entering conversion balances. For bank account, you are required to enter balance as per your bank statement. Receivable should be total of all outstanding invoices. Payable should be total of all outstanding bills.
The setting of xero is easy but every business is different so we recommend consult your accountant while setting Xero. You can get our accounting service and save 50% for first 10 hours. Contact here to start.
Step 7-Set up tax rate in xero:
Tax compliance is important for business. Now, you need to set up tax rate ( Sales tax rate) if you are covered under sales tax / GST. Follow steps below to set up tax rate in Xero:
- Xero gives you tax rate and name of tax as per your country’s tax requirement. Ex. South African companies show vat on invoices and New Zealand businesses show GST on invoices. It is different as per country’s tax laws. Do not worry Xero will handle this for you.
- Go to Settings < General settings < Tax rates.
- Here, you can see default tax rates. You can edit them and you can add new tax rate.
- To add new tax rate in Xero, click on Add New Tax Rate.
- Name the tax rate
- Add component of taxes. Ex. HST has two component – GST and PST. Any one of the component can be compound rate.Compound rate will be applied to taxed subtotal. Please note that it is not mandatory to use compound rate. You can set component without selecting compound.
- You can add component as per your tax laws. Maximum number of components which can be added are six.
- Please note that Xero gives you option to choose tax rate while creating bills or invoices via column tax rate.
- Invoices and credit notes in Xero will display tax rate with components.
- You can edit tax rate any time in Xero. Click on the name of the tax rate. Here, you can edit tax rate name, component name and rate or delete component.
- If you want to delete tax rate, tick at tax rate and click delete. Please note that you can not edit or delete few tax rates which have lock before their name.
- Xero calculates tax automatically and provides you helpful tax reports for GST/ Sales tax / Vat filling. You can see tax amount with regards to different tax rate and different components in reporting section.
Step 8- Set up users in xero:
Xero is cloud accounting system so different users can access Xero from different places same time. However, you can enhance or limit access of users as per your business requirements. Here is the sample user list in Xero:
- Owner / Partners of business / Director of companies / CFO of company.
- CPA and his staff
- Limited access to employee of company as per need.
- Xero support ( Access for limited time to solve any query).
You can set up users in Xero by taking following steps:
- Go to settings < General settings < Users.
- Here, you can see list of users with role, last login details with number of login in current week.
- You can add new users by clicking on invite users.
- Enter basic details with Email address. You can select user role as per need of user.
- There are four user role in xero: Read only user can only see invoices and reports, user with invoice can prepare and approve invoices, you can give access to only sales or only purchases, standard user can do bank reconciliation ( With cash coding or without cash coding), see all reports or no reports, create invoices, change settings. This role is suitable for bookkeeper and accountant. Adviser has higher permission with publishing reports and lock dates. You can also give any access to only payroll.
- Click continue and send invite with message.
- The user needs to accept the invitation to start working under Xero.
- You can edit access of users anytime. For it, go to users and click on the user’s name. Here, you can see here user role. You can change role and edit the Xero access for specific user.
- Please note that there is no limit to add users in Xero. Xero does not charge any extra money to add users. So add or remove user as per your business needs. Important thing is that you should not share login details to avoid data loss, fraud and for audit trails.
- You can delete user anytime if he stops working with your organisation. For it, click on name of user and click delete.
I hope this post helps you in xero set up. If you have any question, feel free to ask in comment box.
Creating and sending invoices through xero is fast and easy. You have option to prepare recurring invoices and accept online payment via xero. This is one of the reasons to choose xero as accounting software for your business. In this post, we will learn about creating and sending invoices, creating quote, accepting payments online via xero.
Creating and sending invoices through xero: Ultimate guide
How to create invoice through xero:
To create invoice through xero, follow the steps below:
- Log in to your organisation.
- Go to Accounts < Sales from menu at the top.
- Click +New. Here you can see various options- Invoice, quote, Repeating invoice, credit note.
- Click Invoice.
- Following screen will appear.
- Fill the required details.
- Please note that invoice numbers will generate automatically.
- You have also option to attach files with invoice. This feature will help you in audit and tax purpose.
- You can send invoice with customized look using branding option.
- If you are managing inventory, you can show inventory at item option. Inventory will be calculated automatically if you have select option of tracked inventory in setting.
- There is no worry about tax management in xero. Xero gives you option of tax in invoice and tax is calculated automatically. All you need to do is select option of tax – Tax exclusive, tax inclusive and no tax.
- You need to select respective account to show sale in profit and loss account. It may be sales account, commission income, discount received etc.
- You can also give discount via xero invoice so that your client can see actual price and discount you have given to him.
- Once you create the invoice, you can save it as draft, save and submit for approval ( if someone else is approving sales invoices in your organisation).
- If you approve invoice yourself, you can click approve button on right side.
- You can see History area at the bottom of invoice. Once you have worked with invoice and save and approve it, you can see complete history of who has created invoice, save it/ edit it, approve it. This we can call audit log.
- If you want to use similar data for another invoice, you can copy the invoice and xero creates copy of the invoice. You can edit required details and new invoice is ready. It is time saving option.
- Xero has given new option – Preview in invoice. Now you can create invoice and preview it at the same time. Preview is available for PC and mobile devices!
- We are human and we make mistake many times. Xero considers this also. You can void your invoice any time if you wish to delete the invoice. Or you can edit the data and save/ approve invoice again. However, you can see voided invoices if you require to check it in future.However, xero does not consider value of voided invoices for reporting purpose. We can compare it with trash feature in gmail. 🙂
- If you have multi currency version of xero, you can create invoice with any currency. New currency can be added with Add currency option.
- No doubt, you can send invoice online through xero via Email option. You can also take print out of invoice.
- You have cool option of share invoice with anybody with Private URL. ( This option is pretty new in xero.) All you need to go to invoice < invoice option < Share invoice. Your customer can see invoice online with it.
- Last but not least, you can do accounting of invoice payment via option given at bottom of approved invoice. Enter amount paid, Date of payment, Payment account ( Enter bank name or contra or cash account) and reference. Do not use this option when you are getting money in bank and bank accounts are imported in xero. You can credit payment via bank reconciliation.
So this was the simplest way to create and send invoice through xero.
How to create quote in xero:
Creating quote is similar to creating invoice with xero. Follow steps below to create and send quote in xero.
- Go to New < Quote.
- You can add Title and summary of quote. It is short narration giving idea to your client about work for which you are sending quote.
- Fill the required details.
- Narrate the terms of your business.
- Save the quote.
- Or you can directly send quote via SEND button on right side bottom.
- You can copy quote if you need.
- Once you send quote, you can convert it in invoice with one click. For it, you are required to mark invoice as accepted. Once you mark it as accepted, you can see option CREATE INVOICE. You can create invoice via it.
- You can also mark it as declined and revise the quote and send it again.
How to issue credit note in xero:
There are two methods to issue credit note in xero.
Create credit note similar to creating invoice:
- Create credit note similar to creating invoice. For it Go to New < Credit note and fill required details and approve it.
- This option is useful when you are giving bonus or special discount/ rebate to customer.
- You are required to deduct credit note amount manually by allocate credit to invoice. The screen to allocate credit amount appears once you approve credit note. You can allocate later by selecting credit note option and then allocate credit.
- You have also option to give cash refund to customer for credit note.
Create credit note from invoice screen:
- Second method is helpful when you issue credit note due to stock return. Follow steps below to create credit note via invoice in xero
- For it, go to invoice against which you intend to issue credit note.
- Click invoice option button on right side.
- Select add credit note.
- You can see all quantity and product description here.
- Remove the quantity for which customer receives the goods.
- Now, you have quantity of stock return.
- Check once and approve and save credit note.
- Xero already deducts credit note amount against the invoice in this method.
How to create repeating bills in xero:
Xero gives you very important feature of creating repeating bills for your customer. This feature is useful when you are selling service/subscription on monthly cycle or you are charging same amount per month for product or service provision.
I become surprised when I see that many popular software for small businesses ( Wave, fresh book) does not give this feature.
To create repeating bill in xero, you need to follow steps below:
- Go to Accounts < Sales < New+ < Repeating invoice.
- You can set repeating bills for per month/alternate month/ quarter/ weekly/ biweekly/ 6 month. For it, you require to enter details in Repeat this transaction every ( It varies as per your requirement.).
- You can set invoice date and due date.
- If you want repeating bills for specific period, you can fill ends on. It means repeating bills will be generated up to end date. Leave it blank if you want to get repeating bills for long period.
- You have three option for repeating bills. It can be saved as draft on invoice date, automatically approved or approved and sent to client. When you are 100% sure with terms of repeating bills, you can select approve and send option. The invoice will be generated and sent to clients automatically. It is really time saving feature, isn’t it? That’s why xero is to be considered as best accounting software for small business.
- You can fill other details of repeating bills same as simple invoice.
- Finally, once you are satisfied with repeating bill you have prepared, save it to see the magic. 🙂
How to send invoice to group in xero:
Sometimes you provide similar service to various clients and charging same fees for it. In this case, you can create group of customers, create and send single invoice to group.
Ex. My firm is providing accounting service to clients A,B and C on monthly basis. Charges for the services are same for them. In this case, I have to create different invoice with same amount, date and terms and send to clients A,B and C separately. By using group invoice feature, I can create single invoice in xero and send it to A,B and C together.
Follow the steps below to create group invoice in xero:
- Create group from contacts menu. For it, got o contacts < Customers. Select customers and click options on top of the screen < Add to group. You can add contacts to existing group or create new group and add them in it.
- Once you have created group successfully, hit to New+ in sales screen. Here you can see invoice to contact group option. Select the group and invoice screen will be displayed.
- You can prepare invoice and save it as draft.
- You cant attach file with this invoice. Obviously !
- You can preview group invoice.
- Once you save invoice as draft, you can go to draft and approve invoice in bulk.
So this was another time saving feature of xero.
How to accept payment online via invoices in xero:
You can accept online payment via xero for following services:
You are required to have account with payment service provider to accept payment via xero. When you send invoice to customer, he can see online bill and PAY now button on Top Left side of invoice. He can click the button and redirected to payment service provider’s dashboard. He gets confirmation once payment is successful. Adding payment service with invoice improves your collection amount. To add payment service in xero, follow step below:
- Go to sales < Any invoice < Invoice options < online payments or Go to setting < Connect < Payment services
- You can view active payment services.
- You can delete or add new payment service by Clicking add payment services.
- Select your payment service provider and enter your login details. If it is paypal, enter paypal email address. You are required to add other details like name which you like to appear while accepting payment, account where money will be deposited ( Create account via chart of account for it), fees account.
- Once you set up payment service, Click on manage themes and select payment service for various invoice themes. Do not forget to preview any invoice to make sure that payment is set up successfully.
How to import invoices in xero:
When you are setting up to xero from other accounting software, you are required to enter due invoices manually or import invoices in bulk. Second option is very convenient. All you need to make excel file using sample file given in xero and import the invoices. Read my post about conversion to xero to learn how to import invoices.
How to send statement through xero:
It is really time consuming to send monthly statement to each customer separately. Xero gives you amazing facility to send statements to your debtors together. ( You can also send it separately ).
Follow the step below to send statement through xero:
- Go to Accounts < Sales and click sent statements button.
- Here you have two options : Activity or outstanding. You can select as per your requirement. Activity will show all the transactions details including paid invoices for debtor and outstanding feature will show only outstanding invoice summary.
- Select period for which you are intending to send statement.
- Click update.
- Tick the debtor name you want to send statement to and click Email. Please note that email address of debtors should be entered via contacts menu before using this feature.
- You can choose branding theme and email template and email message before sending statement.
- You may click send me copy and one statement copy will be forwarded to you.
- Once all things are set, click send and woo ! Your debtors will receive statements soon.
- You will also get message that … statements are sent successfully.
- If some statement is not delivered due to some reason, you will receive mail from xero for non delivery.
How to set invoice reminder for outstanding invoices:
Xero gives you additional feature of setting automatic invoice reminder to your debtors for overdue invoices ! Ultimately it improves your account receivable collection.
Follow the step below to set invoice reminders in xero:
- Go to settings < General settings < Features < Invoice settings. or Go to Accounts < Sales < See all < Click on invoice reminders off.
- Here you can set invoice reminders for overdue invoices as per your business needs.
- Tick Email customers when an invoice is … Here you can send reminder for 7 days overdue, 14 days overdue, 21 days overdue or custom days. You can also delete any reminder by clicking on edit and click on delete button of left side.
- You can include invoice link to the invoice pdf and turn off the reminder for small amount.
- There is facility to turn off reminder for specific customer. For it, go to contacts < Customers < Tick the customer name and click on invoice reminders and select turn off.
- You can also turn off invoice reminder for specific invoice. For it, go to invoice < Invoice option. Click turn off invoice reminder.
I suggest every business owner to use this xero feature to improve cash flow position and save the time.
How to create invoice template in xero:
There is nice feature in xero to use customized invoice template as per your business branding. Use the following steps to create invoice template in xero:
- Go to setting < General setting < Invoice settings.
- Here you can see standard template for invoice.All you need to do is add logo and customize setting as per your need. You can add payment advice, terms and conditions and other details as per your need. Once everything is set, you can view preview of invoice by clicking Options < Preview.
- You can add customized invoice template by clicking on New branding theme and selecting custom.docx.
- Give title of theme.
- Here on right side, you can see Download button. By clicking on button, you can download zip file containing invoice templates.
- Save the templates unzip invoice templates and you will find word files containing invoice, credit note, sales order, statement and purchase order.
- You can open the template you want to edit and customized fields. Read this xero guide for more help. If you are not much familiar with word features, go with standard theme. It gives almost everything you need from invoice.
- Do not forget to customize default setting of invoice as per your business needs. You can change due dates setting, sequence of invoice via it. Xero gives you special feature to show all outstanding of customer via online invoice. Really recommended feature ! Even you can set date of expiration of quote via xero.
I believe you can set invoice template and do necessary setting within 20 minutes. Xero is fast and easy always.
There are many alternative of xero if you compare pricing but there are few alternative of xero if you consider features and looking for easiest way to do accounting. I hope now you are clear about process of creating and sending invoices through xero. We will continue with other xero tutorial and share with you. Share this post on social media to encourage us to write more.
When you have small business, you count every dollar while spending. How to find good accountant in your budget and on your terms and condition is really challenging. However, this post can help you to choose right accountant.
How to find good accountant for your small business ?
Learn difference between bookkeeper and accountant:
Before hiring, be clear about roles of bookkeeper and accountant in your business. Bookkeeper does daily data entry activities. However, it covers preparation of bills, invoices, reconciliation of bank transactions, payroll run, fixed asset accounting, sending and reconciliation statements, answering accounting queries, managing inventory and much more.
Other side accountant ‘s duty covers checking everything, preparing financial reports for taxes, filling of taxes , informing for tax dates, arranging cash flows, entering journals, . Your accountant may be CPA or non CPA.
Should you do your business bookkeeping and accounting yourself?
Some business owners spend their time for bookkeeping in xero, quickbook etc. However, it lasts for initial years of business because generally business grows in 2-3 years and it is difficult to handle the work own self. I recommend hire accountant from 1st month of business. So that he can be familiar with your business and fulfill your accounting needs easily. Long term vision helps you to take the right decision. Read our post why and when you should outsource bookkeeping service to know the benefits of outsourcing books.
Prepare task list and fit it to timeline:
Every business is different. In my career, I have handled more than 1000 books and there is variance in each business. Accountant has to work with different people to gather data. There are different business processes and systems. It is advisable that you prepare accounting and bookkeeping task list and fit them to timeline. Ask the candidate whether he is ready to adhere to timeline and accounting procedures. If business is very small, weekly accounting work is good but you may require accountant presence on daily basis if business grows rapidly.
Discussion about fees:
Don’t be shy for discussion about fees. Ask accountant how he will charge you. He may charge hourly, monthly or special fee per task. Make things clear at the beginning. Bookkeeping fee ranges from $25 to $50. Accounting costs you in range of $200 to $400. It varies with complexity of your business transactions.
Be clear about skills and quality you need from your accountant. He should be honest, punctual, accurate, familiar with specific software, having specific experience, cpa or non cpa, etc. The sad thing is that you can’t test all quality with one interview. Accounting is task which requires accuracy and dedication. Your accountant should love the books and tax rules. This quality helps him to work for you happily in work load and handle difficult client queries.
Decide communication mode:
Make sure that you and your accountant has strong communication while working. Do you want to have his number and call him anytime? Are you OK with communication with mail only? Do you prefer any chat app like Skype for discussion? Discuss this thing with future accountant earliest.
Try for some time:
You may not hit your goal of finding good accountant in first place but you can hire somebody on trial basis and move with him permanently in future or try someone else.
From where can you hire accountant?:
Hire local accountant:
Hiring local accountant is good if you want face to face communication. He can work at your office or at his place. This option is bit costly as you have to pay various monthly allowance to him as employee. As cloud accounting software such as xero, quickbook, zoho, myob becomes so much popular, there is no need of presence of accountant at your place. You can work together online with optimal cost. Read our post about benefits of cloud accounting.
Hire CPA firm:
CPA firm also provides bookkeeping and accounting service. However, it is bit costly in beginning of business. ( They are charging $200 to $300 / hour depends on location of business). You can allocate bookkeeping work to some one else and get help of CPA firm for tax matters.
There are various freelancer available to work as accountant for $25 to $50 / hour. He can prepare you necessary data and you can supply it to your cpa firm.
Hire outsourcing agency:
Online bookkeeping service providers provide bookkeeping and accounting service with affordable monthly packages. There is team of bookkeeper, accountant and tax experts working together. It is one of the best options to hire good accountant for small business. It costs you around $200 to $500 per month and fulfill all your bookkeeping and accounting needs.
If you are intending to hire good accountant, you can avail our service for 7 days free. Contact here to start.
People ask me many times to recommend best small business accounting software. I have used many software in my career. However, I always recommend xero to my clients. Because I am using it for 6 months and I love xero and I am sure that my clients will also love xero. I bet ! Have a read of our xero review, know xero pricing and get save huge with xero discount codes.
What is xero accounting?
Xero is cloud based accounting software. Xero is founded in 2006 in New Zealand. Xero is used by more than 862000 subscribers. Xero users are growing amazingly due to its easiest functionality and features.So what is the special in xero that more and more businesses are choosing xero? Lets see amazing features of xero which makes xero the best small business accounting software.
Why is xero the best small business accounting software?
Error free: It never hangs. It never does errors. It generates report in part of second !
Easiest reconciliation facility: xero makes time consuming process of reconciliation very easy. You can see two columns: one regarding transaction details and one to do reconciliation. There is also features of bank rule, automatic suggestion for possible transaction, minor adjustment, create transaction in reconciliation screen, making part payment, cash coding ( to do reconciliation in bulk) and much more.
Speed: It is really very fast compared to well known software.
Support: Xero has email support. You can mail xero and get answer within 24 hours for query. I get replies for my all queries and other I have solved via xero help centre
Knowledge centre :Learning xero is very easy due to its knowledge centre. Where you can access thousand of posts with videos. You can also get answer of your query with xero community.
Repeating bills/invoices: It is small but helpful feature. Many well known software does not provide this facility and it is meaning less to prepare same bill/invoices per month again and again.
Online payment facility:You can get small button for pay online on your invoice and receive payment through various popular payment services. Payment service supported are authorise.net, braintee, dps, eway, gocardless, paypal, stripe. Read here to know more.
Inventory management: Xero gives you facility to manage inventory with accounting for the same. There are two types of inventory management in xero: tracked and untracked. You can get facility to manage and count inventory items when you use tracked inventory. Special reports are also available specially for inventory.
If you prefer to use any other inventory management software, ad ons are also available to integrate xero with other system. You can integrate following inventory management systems with xero:
- Dear systems
- Unleashed inventory
- manu online
- and many more. (Check other option here)
Payroll support: Employee payroll is easy thing with xero. You require input of basic data of payroll and there is facility to do payroll with few clicks. There is also privacy features for access of payroll. You require to purchase payroll additionally in xero.
You can integrate other popular payroll app with xero. Gusto, surepayroll , appogeehr etc. are supported. Read full list here.
Xero helps you to prepare data for tax filling. All accounting things are very smooths in xero. Initially you require to set up tax rate as per your country law and you get tax options while issuing invoices or entering bills. Various tax reports are also available in xero. If you are from australia/ new Zealand, you can file taxes with xero tax. For US taxes, you can get help of additional software such as Avalara.
Xero provides you audit facility together with accounting. You can see at the bottom of the invoice/bill/entry that transaction is entered by whom, approved by whom, edited by whom, voided by whom. This creates accountability in accounting system. If there is any error, you can easily find who makes mistake. See the screenshot to get the idea.
Xero provides you awesome reporting facility with customization option. You can have facility to prepare custom report as per your need. You can report for quarter, current financial year, year to date or as per your requirement. There is also facility to compare actual data with budgeted data. Some people loves graph. They will not disappoint with xero. Graphical representation of data is also available.
Link system: Xero is designed perfectly keeping mind the accounting work. It is obvious that while doing accounts, we require to compare and access various data in same time. Xero gives link to each data and link can be opened in new tab. In screenshot, you can understand this thing. I can go to payable report. See my creditors month wise. Now, I can click NSDL and see all the bills related to NSDL. Or I can copy link by putting courser on NSDL and open it in new tab. Similarly, I can see data for different month in new tab by copy link address. This makes xero the easiest accounting software. You can open the data in new link, use as per your need and close the tab. You can access as many reports/data as you want at the same time!
Xero supported vast number of ad ons. You can integrate xero with shopify, woocommerce, paypal, stripe, zapier, fundbox, receiptbank, bill.com, gusto, tsheets, freshdesk, proworkflow, google docs, boxkite, Gsuite,liveplan and many more. You can check ad on list here.
Due to easy integration with various app, eCommerce, inventory management, time tracking, payroll management, job costing, practice management, document management, business plans etc are easily being done with xero.
Xero pricing ranges from $9/month to $70/month. Mid range plan is $30/month covering unlimited invoices/ quotes/bills/bank reconciliation with payroll up to 5 people. However, this plan includes only home currency. If you want to get multi currency feature, you require to go with premium 10 plan.
Xero Promo code/ Discount code:
We have collected xero discount codes ( Promo codes) for you to save you while purchasing xero.
Xero US discount code:
Xero is very popular in Australia and New Zealand. Xero is also serving to US/UK. With this discount code, you can get 30% OFF for first 6 months. Use Xero30Now coupon or go with this link.
Xero Singapore coupon:
You can save 50% for 4 months if you join xero with this link. This offer is valid till 31st March, 2017. Use code ACTIVATEONLINEH117
Xero discount code for Non- profit:
Xero gives special 25% discount for Non profit business. Go with this link to claim your discount while purchasing.
Xero UK Discount code:
You can save 50% on Xero UK. Use this link to claim 50% off while purchasing for 12 months. Go with this link to save 50%.
Xero Australia promo code:
There is no coupon available for Xero Australia. However, you can join free trial of xero for first month. Click this link to start your trial.
Xero Canada Promo code:
There is no promo code available for Xero canada now. However, you can get 1 month Free trial with this link.
Xero south Africa Promo code:
Xero gives hoge discount for South African users. You can get 50% Off for first three month. Use this link to save. ( Offer is limited to 31st March, 2017.- Coupon code – MAR17).
Xero Ireland coupon code:
There is no coupon available for Ireland users. You can get first Free month with this link.
Free 30 day trial of xero :
You can get 30 days trial of xero so that you can be sure before purchasing. Click this link to join trial. Xero does not want your credit card information to join trial. You can get good experience of xero features with xero trial.
Quickbook, freshbook, waveapps are also good software but I choose xero for easiest functionality. You can rely on my words or try xero here free for 1 month !