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Bookkeeping basics

Bookkeeping basics

Jan 1, 2001 12:00 PM, By Mark Krieger, CBT

While it may be an article of faith that broadcast engineers tend to be analytical, does it follow that we are naturals when it comes to business principles? Of course not, because business sense isn’t a sense at all. It is a skillset that has to be learned, refined and progressively updated. Unfortunately, most broadcast engineers don’t have the benefit of a background in business education. In fact, many of us have little or no business experience on the day we first decide to hang up the �for hire� sign.

So just what do we need to know? To get answers, I spent some time talking with Tom Scheiman, a CPA with years of experience in small business accounting and tax issues. Although his observations don’t qualify as breaking news, his points are emphatic and specific. No matter what structural form your company takes, be it sole proprietorship, partnership, or corporation, the essential ingredients of a successful business are the same with discipline acting as a recurring theme throughout.

A genuine commitment to establish and run your business requires the development of a business plan. Such a plan need not be elaborate, but it has to address two key areas:

  • � What is the basic mission or objective of the business, and what types of products or services will be provided? It may sound ludicrously simple, but the parameters established here will shape the structural form of the business and the amount of capitalization required. Don’t overlook retirement savings as an important part of this plan.
  • � Who will keep the books? Again, the answer seems simple. Most engineers are born record-keepers. Yet, this trait (or lack thereof) is not the sole determinant in the accounting equation. As was pointed out earlier, effective accounting practices are an acquired and refined skill. While you might save some money on accounting fees up front, failing to retain professional accounting and tax advice at the outset could ultimately prove to be very costly. Our CPA advises that seeing an accountant after making a mess of the books is as common and counterproductive as seeing a doctor after experiencing your first heart attack.

With the second point in mind, let’s take a brief inventory of the basic checklist for small business bookkeeping, with tax issues and good business practices as guiding principles. Keep your personal finances segregated from business finances, and avoid any temptation to cross the line that divides them. A separate checking account for the business is a must. All business income and expenditures should ultimately move through this account, allowing the checking account record to serve as the ultimate back-up to any manual or software-based ledger system. Like so many other fundamentals, this sounds obvious in theory, but is difficult to completely enforce on a day-to-day basis.

As an example, let’s say that in a hurry you purchase $4 of hardware for a client project. You pay cash and get a receipt because it’s convenient. Do you remember to pay that petty cash out of the business account and record the details of what the materials were used for?

The same thing holds true for a business credit card, which Scheiman suggests using as sparingly as possible. The problem with credit cards is that their ease of use allows budgets and fiscal reality to get tossed out the window in the heat of the moment. Further complicating things is that a credit card statement and a pile of receipts are no substitute for good records of how and for what purpose the materials or services purchased were ultimately used. Naturally, the card balances must always be paid with a company check.

On the road

Vehicle use is another area demanding close attention. If we choose to use our personal vehicle jointly for work, we need to keep a logbook recording business mileage on a daily basis. These records will be required in any IRS audit that might befall us. If we have a separate company vehicle that is used only for the business, this may simplify things somewhat, but does not relieve you of the burden of keeping accurate, detailed records of vehicle-associated expenses. In tax terms, the options of taking the higher of either the standard IRS per-mile deduction or actual recorded expense of vehicle operation are both open. This can get tricky when a vehicle is jointly used, so don’t run any red lights on the road or on the books.

Capital expenses, depreciation and office space can be thorny issues, but the IRS will allow you to deduct just under $20,000 annually for the purchase of equipment and tools. The office deduction issues can get quite complicated, especially if you work out of the home. Again, consider qualified professional consultation with these issues before you come up against tax deadlines.

Likewise, income must be carefully recorded and managed. When you receive any funds from a client, sell parts, or even old equipment, keep records of all invoices or bills of sale along with contact information for the client or purchaser.

Record format

Scheiman offers the following observation about the business software packages that are quite popular in the trade. While they give a nice, professional look and great convenience to the bookkeeping chores, they may also lull the user into a false sense of security. Even the best software cannot reach beyond cyberspace in gathering the facts and information essential to the success and legal health of a small business. The adage �garbage in/garbage out� applies doubly here.

Bookkeeping basics are the same as they have been for centuries: Keep thorough records, seek good counsel and treat your books with the care and attention they deserve.

If you are a contract engineer and would like to provide input to Mark for upcoming Contract Engineering columns, contact him directly at [email protected].

Mark Krieger, BE Radio’s consultant on contract engineering, is based in Cleveland.