INTRODUCTION
This information is provided to people who are starting a mail order business and require a basic accounting system. It has been written for someone who has little or no accounting experience. No income tax or professional advice is provided. Such advice should be obtained from a CPA or attorney.
The operation of any business requires a basic system to keep track of income and expenses. There are two good reasons to keep good records.
1. It is the law. The IRS, the State Income Tax Division, and the State Sales Tax Division (where applicable) require you to keep complete and accurate records.
2. Keeping good records is good business. It helps you better understand your business. It will let you know at all times how your business is doing: how much money you are making or losing. It also allows you to analyze expenses and income. You can see seasonal and other trends unfold. All this will help you make sound business decisions.
BUSINESS CURRENT ACCOUNT
It’s best to set up a separate business checking account with your bank for your business. This account is to be used only for the deposit of business-related income and the payment of business expenses. In this way, you maintain a distinction between business and personal expenses.
STATE SALES TAX
In most states, you are required by law to collect the applicable state sales tax. This only applies to sales within your state. Out-of-state buyers are not charged sales tax. Only the sales tax of the country of the end user. If you must sell to a dealer, he or she can provide you with a sales tax exemption certificate. In this case, he is not required to pay you sales tax, as he will collect it from his customers.
STATE USE TAX
Use tax generally applies when a business purchases supplies or equipment for its own use from an out-of-state business. It does not apply when material or merchandise is purchased from an out-of-state company that will be resold. The use tax rate is the same as the sales tax rate.
For specific information on the regulations in your state, call the nearest State Sales Tax Division in your area.
ADQUISITION OF EQUIPMENTS
When acquiring office machines, such as typewriters, computers, photocopiers, furniture, etc. Such expenses are generally depreciated on your tax return over a period of time.
EXPENSES RELATED TO A HOME OPERATED BUSINESS
If a business is operated from your home, in many cases, a portion of the rent, mortgage, or other expense may be deductible when reporting your income tax. The same can apply to utility expenses. There are specific laws relating to this and again you should seek professional advice.
EXPLANATION OF FORMS
We have provided you with several forms. You can use them as they are or change them to fit your particular needs.
1. DETAILED FORM OF MONTHLY EXPENSES
In the left column, you keep track of the expenses for merchandise and products that you resell to your customers. The accounting term is usually cost of goods or products, or cost of sales. If you sell books by mail order, you should record your purchases of these goods (including direct shipments) in this column.
The right column should be used to record all other expenses. You get this information from your business checking account. If you pay business expenses in cash, keep track of these expenses separately and enter them in this column as well. If you also use one or more credit cards to pay for business expenses, list these expenses here as well. It is best to designate a credit card to be used only for business expenses. Do not mix personal charges. In this case, you may be able to deduct the interest on your taxes.
2. INCOME AND EXPENSES FORM
Record your daily income in the left column. Since you may not have daily income in the early stages of your business, you can record income less frequently, such as weekly or even monthly.
You may want to keep a separate income journal. The purpose of such journal would be to provide you with a more detailed breakdown of your income. Set it up the way you think best suits your needs. For example, you may want to record new business separately from repeat business. If you sell dealers and books, for example, you may want to record dealer revenue separately from book revenue, etc.
In fact, in the right column of this form, you can track your spending by category. Once again, you can change the categories to suit your particular needs.
When you deduct your expenses from your receipts at the end of the month, you will have an income or loss figure for your business.
PROFIT AND LOSS STATEMENT FORM
Here it shows you the monthly income, expenses and loss of earnings. There are no requirements for you to do this monthly.
Especially in the early stages of your new business, you may want to generate a quarterly, semi-annual, or even annual profit and loss statement.
RESUME
The information and forms above will give you a basic system. Adapt it to fit your own situation. You may want something more elaborate or less detailed. Or you may not even put all of your business accounting on your PC. If you are considering purchasing a software program to help you with your accounting, I strongly suggest that you wait until you have a good understanding of your business. Also, accounting software can be difficult to use for a person with no accounting experience. A personal money management software system will generally be quite adequate for most small businesses.
Don’t feel overwhelmed by record keeping for your new business, especially if this is new to you. Government agencies do not require you to keep your books in a particular way, but they do require you to keep good records. This also means that the records must be substantial. Again, your accountant can provide you with detailed information on existing requirements.
While the great task of any new business is to develop sales and acquire customers, good record keeping is often found in successful business operations. Your records provide you with accurate current and past information that you, as the owner and president of your company, must constantly use to analyze your business and maximize profits.
Copyright 2004 by DeAnna Spencer
