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Bookkeeping Documents

Bookkeeping FAQ's

Q. What is the Income Statement?

The Income Statement is often referred to as the company profit and loss statement. Unlike the Balance Sheet, which shows balances of accounts on a specific date, the Income Statement shows the company revenue and expenses for a specific period of time. Expenses are subtracted from revenue to arrive at the company net income, which is also referred to as the bottom line.

Q. What is the Balance Sheet?

The Balance Sheet summarizes assets, liabilities, and stockholders' equity at a specific date. The Balance sheet follows this basic formula: Assets = Liabilities + Equity. Assets are the things that the company owns and the things that the company is owed. Liabilities are the things that the company owes. Equity is the amount that the owner capital invested into the company and earnings that have been retained in the company.

Q. When should you use form W-9?

A W-9 should be sent to subcontractors or outside services used by your company before releasing a payment for services rendered to that company. Use form W-9 to request the taxpayer identification number of a U.S. person and to request certain certifications and claims for exemption. For federal purposes, a U.S. person includes but is not limited to an individual, a partnership, a company, a corporation, an estate, a domestic trust, or an association.

Q. What is “accrual” vs. “cash” accounting?

In the easiest kind of company, say a lawn mowing business, all transactions are in cash. Income is recorded when payment is received. Expenses are recorded when expenses are paid.

However, most companies use and grant credit. Furniture dealers often offer several months before payment need be received from consumers. Similarly, many companies purchase from suppliers using credit. The income statement is based on the "accrual" principle, i.e., a sale (or cost of sale) should be recorded when the item is shipped. An expense is recognized when a purchase is made (not necessarily when the purchase has been paid for in cash). When using the accrual method, a company tracks on its balance sheet what is owed to them (sold but not paid for) in an accounts receivable account and they also track what they owe to suppliers (purchased but not paid for) in an accounts payable account.

Q. What is the purpose of having financial statements?

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements are used for making business decisions, preparing tax forms, applying for loans, and many other purposes.

Q. How long should I keep my accounting records?

It is recommended that annual financial statements be kept permanently. Bank statements, bank reconciliations, inventory records, loan payment schedules, sales records, accounts payable, accounts receivable, and canceled checks should be kept for a minimum of 7 years. Depreciation schedules, fixed asset purchases, and year end general ledgers should be kept permanently.

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