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Accounting & Audit

Saying Goodbye to a Year of Accounting

By Accounting & AuditNo Comments

As we approach the end of the year, there are a few things to keep in mind regarding your accounting as 2015 winds down and we prepare for the New Year.

After all of your regular day-to-day transactions have been entered, a great place to start is reconciling your bank accounts and credit cards to ensure you’re not missing any transactions as of the end of the year. Another helpful tool is matching general ledger balances to supporting documentation to ensure all business events and transactions have been properly recorded.

To make sure revenue and accounts receivable are accurate, complete your invoicing for the year and evaluate your allowance for doubtful accounts. Review your accounts receivable aging and write off any accounts not likely to be collected as bad debt.

Review your expense accounts for any payments made in advance of services received. If you have paid any expenses in advance (i.e. rent, insurance, etc.), make adjustments to reflect them as a prepaid expense or asset on your balance sheet.

Update accounts payable by locating any bills received and not yet recorded. If a payroll accrual is necessary, calculate accrued wages and accrued vacation expense.

Ensure all fixed assets purchased and disposed of during the year have been recorded appropriately. Calculate the proper depreciation and amortization expense.

Lastly, a great final check is to compare your 2015 operating results to prior year, if you haven’t already done so, to ensure everything looks reasonable. If you use an accounting software such as QuickBooks, net income is automatically closed to retained earnings. Otherwise, once everything is finalized, book your final closing journal entry to close out all income statement account balances to retained earnings.

Although this list is not all inclusive, we hope these pointers will help provide a smoother transition into 2016. Remember, we are always here to help make your busy holiday season an easier one. Happy Holidays!

The Importance of W9s and Other Year-End Cost Saving Tips

By Accounting & AuditNo Comments

If your business spends $600 or more for services from another business or independent contractor during the tax year, you may have to report the amount on a Form 1099.  How does a business track these vendors and payments?  The answer is simple: Through adequate books and records.

A business should be mindful of its requirement to collect information on its vendors all throughout the year.  When you encounter a new vendor, a Form W9 should be collected from that vendor.  Form W9 is the form used to communicate information that will eventually be reported on the annual Form 1099 such as the business name, address, entity type and federal ID number.  It is best to collect the Form W9 before payment is provided in order to avoid costly issues later on.

Not all vendors will be issued a Form 1099, but it is better to have the information and not need it, than need the information and not have it.  As your business grows you may require additional services and having the appropriate records can save a great deal of time and money.

To download a PDF copy of the standard W9 form, click here. Or, contact us for further assistance.

Other Cost Saving Tips:

  • Go Paperless… Go Green.

Keeping accurate records is a must, but that doesn’t always mean storing boxes of archived documents. Electronic copies can be more effective as they are easily accessible and literally take up no space in your office. This also makes it simple to send documents to your tax professionals should questions arise regarding a specific transaction.

  • Track Independent Contractors in Quickbooks.

Quickbooks has a function where you can track vendor information and code as a vendor who should receive a 1099.  You can input all pertinent information of the vendor including their Federal Tax ID number for easy processing of Forms 1099 at year end.

  • Hire a Bookkeeper.

Having an experienced Bookkeeper throughout the year to keep your accounting updated and accurate can prevent costly adjustments by your tax professional. A bookkeeper’s hourly rate is much lower than that of a tax professional, so you may have to spend a little now to save a lot later.  Our bookkeeping staff is ready to assist you with your accounting and record keeping needs.

Subsequent Events: When Do I Record and When Do I Disclose?

By Accounting & AuditNo Comments

When should subsequent events, that occur after the balance sheet date but before the financial statements are issued, be recognized in the financial statements or, rather, merely be disclosed in the notes to the financial statements?  In order to answer this question, it is important to first define what is a subsequent event?  Per the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 855-10-20, Subsequent Events are defined as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

There are two types of subsequent events. The first type of subsequent events are events or transactions that provide additional evidence about conditions that existed at the balance sheet date. The second type are events that provide evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.

When should subsequent events be recognized in the financial statements? 

Events that provide additional evidence about conditions that existed at the balance sheet date should be recognized in the financial statements. Some examples of recognized subsequent events are:

  • Settlement of litigation related to an event occurring before the balance sheet date for an amount different from the liability recognized in the financial statements.
  • Events that affect the realization of receivables due to conditions that existed at the balance sheet date. This may occur when trade accounts receivable becomes uncollectible due to a customer filing for bankruptcy after the balance sheet date but before the financial statements are issued. Even though the filing for bankruptcy occurred after the balance sheet date, the customer’s deteriorating financial condition at the time of the balance sheet date is indicative of conditions existing at the balance sheet date.

Events that provide evidence about conditions that did not exist at the balance sheet date, but arose after the balance sheet date but before the financial statements are issued should not be recognized. Some examples of unrecognized subsequent events are:

  • Sale of a bond or capital stock issued after the balance sheet date;
  • A business combination that occurs after the balance sheet date;
  • Settlement of litigation when the event giving rise to the claim took place after the balance sheet date;
  • Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date.

Disclosure Requirements

In accordance with FASB ASC 855-10-50, if an entity is a non-SEC filer, the entity shall disclose the date through which subsequent events have been evaluated. That date is either the date the financial statements were issued or the date the financial statements were available to be issued.

Additionally, certain unrecognized subsequent events must be disclosed if they are in such nature that omitting them would cause the financial statements to be misleading. For these events, the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made, must be disclosed. Some unrecognized subsequent events may best be disclosed by supplementing the financial statements with pro forma information that reports the event as if it occurred at the financial statement date.

Accounting and Assurance Services

By Accounting & AuditNo Comments

Lindsay & Brownell has an accounting and assurance department, often referred to as an A&A Department, which can provide a variety of services for its clients. Each service has the ability to strengthen an entity’s accounting in the areas of operating effectiveness, efficiency, and/or financial statement reliability and accuracy. A&A services differ in the type of work that is performed, however, both branches help propel an entity to a more stable financial reporting level.

The first part of A&A stands for Accounting Services. Accounting Services offered by Lindsay & Brownell include bookkeeping, consulting, internal control review and agreed upon procedures. Each area is explained in more detail below:

Bookkeeping: Bookkeeping is the process of recording financial transactions in a central accounting system to be accumulated into financial statements for a business. Bookkeeping includes recording a host of transactions such as purchases, sales, receipts and payments. Additional duties considered under bookkeeping include document management, payroll, invoicing, A/R management, bill payments, and vendor management. It is vital that transactions are recorded correctly and timely in order to provide a complete and accurate picture of the financial position of the business.

Accounting Consulting: Accounting consulting services play a crucial role in helping an entity enhance its accounting and reporting process, improve operating performance, and interpret financial results. Accounting consultants provide services such as the review of significant accounting processes, analyzing weaknesses in the processes which would subject the business to errors or fraud, and provide suggestions for improvements to these processes. Accounting consultants also assist with budgeting, projections, cash management, financial statement close, and will offer specialized financial advice related to the client’s specific business or industry.

Internal Control Review: An assessment of internal controls (not an audit) is a consulting engagement to analyze the client’s internal control structure through an extensive process of client interviews, walkthroughs of significant accounting processes, and identification of controls in place. After gaining an understanding of the processes used and internal controls in place, recommendations are made to improve operating efficiencies and suggestions are given for the implementation of additional preventative or detective controls to mitigate fraud risk factors.

 The second part of A&A stands for Assurance. Assurance Services are comprised of  three  general engagement services that Lindsay & Brownell provides: compilations, reviews, and    audits. These services provide an entity with the means to comply with   statutory requirements  and layout critical information for making well-informed business decisions. The three  assurance services that Lindsay & Brownell provides are detailed   below:

Compilation: A compilation of financial statements is the lowest level of service CPAs provide with respect to financial statements. In a compilation engagement, the accountant assists management in presenting financial information in the form of financial statements. Although the CPA must comply with standards set forth by the American Institute of Certified Accountants (AICPA) which require the accountant to have an understanding of the client’s business and industry and must read the financial statements to consider whether they appear appropriate in form and free from obvious error, a compilation does not require the accountant to perform analytical procedures, an assessment of internal controls or test individual transactions. No opinion is issued in a compilation related to the accuracy or reliability of the financial statements.

Review: A review engagement is the next level of service a CPA can provide with respect to financial statements. In a review, the CPA performs inquiries, analytical procedures and other procedures as deemed necessary, based on the CPA’s understanding of the client’s industry, business it operates, and associated risks identified. In a Review engagement the CPA reports that they are not aware of material modifications that should be made to the financial statements. A Review engagement does not consider obtaining an understanding of the entity’s internal controls, assessing fraud risk, testing accounting records, or other procedures ordinarily performed in an audit.

Audit: Audited financial statements provide the users of the financial statements with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting standards. In an Audit, the auditor is required to gain an understanding of the entity’s internal controls, assess fraud risk, and corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inspection, examination, confirmation, and various other procedures.  When reporting on an Audit, the auditor can issue one of four opinions, either: unmodified (the financial statements are free from material error), modified (the financial statements represent the entity fairly but are not in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)), adverse (the financial statements do not conform to U.S. GAAP and there is a material misstatement), or a disclaimer of opinion (which occurs when an auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the possible effects could be both material and pervasive).

Conclusion: Businesses of all types can utilize these A&A services to improve their accounting and business operations. Lindsay & Brownell has been providing A&A services to its clients for over 20 years. Please contact us so that we may assist you in improving your business.

Related Party Transactions

By Accounting & AuditNo Comments

Per FASB ASC 850, Related Party Disclosures, information about material transactions with related parties should be disclosed in the financial statements. A related party is defined as an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may be any party the entity deals with that can exercise that control. Examples of related parties are affiliates, key management, principal owners of the entity and members of their family, and other parties with significant influence.

Common related party transactions may include:

  • Sales, purchases, and transfers of property.
  • Services provided or received.
  • Property and equipment leases.
  • Loans or guarantees.
  • Maintenance of compensating bank balances for the benefit of a related party.
  • Allocations of common costs.
  • Filing consolidated tax returns.

FASB ASC 850-10-50, Related Party Disclosures, requires that financial statements include disclosures of material related party transactions. These disclosures should include:

  • The nature of the relationship involved.
  • A description of the transaction.
  • Dollar amounts of transactions.
  • Amounts due from or due to related parties as of the date of each balance sheet presented.

Additionally, the FASB issued an Accounting Standards Update, ASU 2013-06 Not-for-Profit Entities, which addresses revenue recognition guidance for contributed services from an affiliate. The amendments in this update are effective prospectively for the fiscal years beginning after June 15, 2014, and interim and annual periods thereafter.

Refer to the following link for more information:

https://www.fasb.org/jsp/FASB/Document_C/DocumentPagecid=1176162374871&acceptedDisclaimer=true

QuickBooks Tips: Downloading Financial Information Directly Into QuickBooks

By Accounting & AuditNo Comments

Managing your bank accounts and credit card balances can be one of the most frustrating and time consuming aspects of running your business. Using the QuickBooks Bank Feed feature can eliminate some of the most common problems with reconciling your accounts.

  • Avoid missed transactions
  • Avoid duplicate transactions
  • Save time from manually entering each transaction
  • Improve the accuracy of transaction dates
  • Improve the accuracy of transaction amounts

With QuickBooks Bank Feed you can securely download new transactions or match existing ones. The first time you work with QuickBooks on downloading your activity, you are essentially teaching QuickBooks about your business. Soon QuickBooks will start recognizing familiar transactions and match some of them for you. Downloading these transactions can be done one of two different ways.

  • Direct Connect – Users login seamlessly to the financial institution within QuickBooks (Recommended)
  • Web Connect – Users will download a file from the financial institutions website and then import the file into QuickBooks

Most financial institutions offer participation in QuickBooks Bank Feeds Direct Connect or Web Connect at no additional charge. The Bank Feed feature is already available to you with your QuickBooks Software versions 2013 or newer as well as with QuickBooks Online. With a few simple steps you can get started today and we are here to help you along the way!

Allowance for Doubtful Accounts

By Accounting & AuditNo Comments

Accounting estimates are a significant part of the financial statements that require the use of judgment by management based on knowledge and experience of past and current events. It’s important that these estimates are accurate so that the financial statements portray a fair representation of the financial position of the company in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The allowance for doubtful accounts is one example of an important estimate made by management and there are several methods to use in determining the estimate.

What is an Allowance for Doubtful Accounts?

The allowance for doubtful accounts is used to anticipate that some accounts receivable will not be collected. U.S. GAAP states that the conditions under which receivables exist usually involve some degree of uncertainty about their collectability, in which case a contingency exists. The loss from uncollectible receivables needs to be reflected on the income statement and balance sheet in order to present a fair depiction of the state of the company. For instance, if an organization made a sale to a customer on credit one year ago and that amount is still outstanding, there is a good chance that the money will never be collected. Presenting that sale on the balance sheet as an account receivable would be misleading to the users of the financial statements. U.S. GAAP requires the accrual of losses from uncollectible receivables if a loss is probable and the amount of the loss can be reasonable estimated (FASB ASC 450-20-25-2).

Methods to Calculate an Allowance

Authoritative literature does not provide requirements on methods to develop an allowance for doubtful accounts. There are various methods used in practice such as the sales or income statement approach, which uses a percentage of the company’s total sales for the period, or the balance sheet approach, which uses a percentage of accounts receivable for a period.

The income statement approach is an approach by which management can estimate an allowance for uncollectible receivables as a percentage of the period’s sales.  An allowance as a percentage of sales is an effective approach when the company has past experience or history to use as a guide.  For example, if a company’s bad debt expense as a percentage of sales has historically been between 3% and 5% for the past 5 years, a reasonable allowance using the income statement approach would be 4% of sales for the current period.  As the credit quality of the company’s customers improves or deteriorates over time, the percentage used for the allowance can be adjusted up or down accordingly.

A newer company, which would not have a history of past write-offs and good credit history with customers, would not benefit from the income statement approach for estimating their allowance for doubtful accounts but rather a balance sheet approach. The balance sheet approach estimates the allowance for doubtful accounts based on the accounts receivable balance at the end of each period. A useful tool in estimating the allowance would be the accounts receivable aging report, which states how far past due specific customers balances are that make up accounts receivable. The longer the balance has been outstanding, the higher the likelihood that the balance will not be collected. Management should first review the aging report and specifically identify the accounts with the highest risk of nonpayment and reserve for those accounts individually.  Then management should estimate the risk of nonpayment of the customer accounts remaining in each of the aged categories with a higher percentage allocated to the significantly aged accounts and a lower percentage to the recently billed accounts.

Some companies may use a hybrid method utilizing the balance sheet and income statement approach.  A company may use an income statement approach and record an allowance based on a percentage of sales, and then adjust the allowance based on a specific review and analysis of the accounts receivable aging report.  Management can adjust the allowance based on credit worthiness of a specific customer, risks identified, or change in current write-off history.

Conclusion

Estimates are the responsibility of management to improve the accuracy of the presentation of the financial statements. When a receivable exists there is a degree of uncertainty about the collectability of that receivable and per U.S. GAAP that uncertainty should be estimated and recorded. All methods require management to determine a percentage estimate based on their understanding of the industry, current economic factors, and the customers’ payment history and credit worthiness.

Agents and Intermediaries: Recognizing Revenue Collected on Behalf of a Non-Profit

By Accounting & AuditNo Comments

Agents and Intermediaries

An intermediary is a recipient entity who acts as a facilitator for the transfer of assets between a potential donor and a potential beneficiary, but is neither an agent or trustee nor a donee and donor. In this situation, the intermediary simply collects the cash or other assets from the donors and remits it to the charitable organization, or the beneficiary.

An agent is an entity that acts for and on behalf of another. A recipient entity acts as an agent for and on behalf of a donor if it receives assets from the donor and agrees to use those assets on behalf of or transfer those assets to, a specified beneficiary. A recipient entity would be classified as an agent for and on behalf of a beneficiary if it either collected funds specifically for donation to a specified beneficiary, or if that specified beneficiary granted the recipient entity the right to distribute those funds on the beneficiary’s behalf. Even if the money does not go directly to the beneficiary, but the beneficiary is directing the funds, the recipient organization is still considered the agent.

For example, assume a flower shop collected funds from its customers to donate to the owner’s favorite charity. If the flower shop was acting as an intermediary, then the donors would be aware that the funds are going to a specific organization, not just for a general purpose (i.e. “to help local schools”), and the funds would be transferred directly to that organization. If it was acting as an agent for the charitable beneficiary, then the donors would still be aware the funds are going to the specific organization; however, the beneficiary could give the flower shop permission to distribute those funds on the beneficiary’s behalf.

Accounting Treatment for Agency and Intermediary Transactions

Per FASB ASC 958-605-25, an agent or intermediary shall recognize its liability to the specified beneficiary concurrent with its recognition of cash or other financial assets received from the donor. A recipient entity that receives nonfinancial assets is permitted, but not required to recognize its liability and those assets provided that the recipient entity reports consistently from period to period and discloses its accounting policy. In these cases, there is no effect on the income statement of the recipient organization.

The specified beneficiary should recognize the right to those assets at the time they are collected by the recipient organization. This can be reported in three ways: (1) as an interest in the net assets of the recipient entity if they are financially interrelated; (2) as a beneficial interest; or (3) as an unconditional promise to give. The beneficiary will recognize the contribution revenue at fair value.

Variance Power

Variance power is the unilateral power to redirect the gift to a beneficiary other than the beneficiary specified by the donor. If an agent or intermediary is granted variance power, the accounting treatment is changed. Per FASB ASC 958-605-25-25, a recipient entity that is directed by a donor to distribute the transferred assets, the return on investment of those assets, or both to a specified unaffiliated beneficiary acts as a donee, rather than an agenttrustee, or intermediary, if the donor explicitly grants the recipient entity variance power. For example, if the collections are for the benefit of cancer research, the recipient organization has variance power in that it has the ability to choose which specific charitable organization will be the recipient of the funds, an action which does not require the approval of the donor.

If the recipient organization has variance power, they should account for the receipt of funds by recording an asset and the corresponding contribution revenue, unless special circumstances apply. The beneficiary organization should not recognize any potential right to the assets held by the recipient organization until the beneficiary receives the contributions or they are unconditionally promised.

Special Circumstances

If the transfer of assets to the recipient entity with variance power is revocable, repayable, or reciprocal, then the donor retains control over the transferred assets. In this case, the transfer is not considered a contribution and shall be accounted for as an asset by the donor and a liability by the recipient organization.

Conclusion

When collecting funds on behalf of another organization, it is important to recall the special accounting rules that apply. Consider whether the funds are explicitly designated for a specified beneficiary or whether the entity receiving the funds has the power to decide where the funds will go once collected. If acting as an agent or intermediary, a recipient organization should report an asset and corresponding liability before the funds are transferred to the beneficiary. However, with variance power, the recipient organization will record the contribution revenue for the funds raised.

Nonprofit Audit Committees: Their Purpose, Significance, and Effectiveness

By Accounting & AuditNo Comments

With the ever changing economic environment and the increase in reports of financial debacles and alleged fraudulent activities, there has been an increasing demand for more effective measures of regulation in the nonprofit industry. Many of these concerns were answered with the creation of the Nonprofit Integrity Act of 2004 (“Integrity Act”), which included the requirement for certain nonprofit organizations to have financial statement audits.   The Integrity Act also requires the establishment of an audit committee.  An audit committee holds a vital role in the audit process as it is responsible for  overseeing the financial statement audit and the financial reporting and disclosures of the nonprofit’s financial statements.

Who make the best audit committee members?

When forming an audit committee it is important to consider who it should consist of. Members on the committee should have a high level of involvement with the stakeholders within the organization to ensure they fully understand the organization including its risks, environment and culture. Members of an audit committee must be independent of management in order to be truly objective in the discharge of their duties. The inclusion of at least one audit committee member with financial expertise is a highly recommended best practice. A financial expert is one who is knowledgeable in Generally Accepted Accounting Principals (“G.A.A.P.”) and nonprofit financial statements, can assess internal controls and procedures for financial reporting, and understands the function of an audit committee. It is important to include a financial expert so there is complete understanding when communicating between the audit committee, the nonprofit’s management, and the external and internal auditors. The remaining members of the committee should be comprised of two to five additional individuals with diverse backgrounds and experience in areas such as finance, industry, or leadership to obtain a balanced perspective as a whole. Lastly, someone will be appointed as audit committee chair. This role requires a strong, independent and competent communicator who is willing to ask tough questions of management and others in order to truly understand and ensure that the audit committee is focused on risk management and financial oversight of the organization and that the organization’s strategic direction is in line with reality.

What is the mission and responsibilities of the audit committee?

Once an audit committee is established, the next step is to establish and understand its mission as well as its responsibilities to the entity it works with. An audit committee’s mission should specifically revolve around the oversight of the conduct and integrity of financial reporting, inclusiveness of internal accounting and disclosure controls in the form of risk management, and communication with independent auditors, both internal and external. An audit committee’s responsibilities include maintaining independence, managing the independent auditor, establishing procedures for handling complaints, engaging third-party advisors when needed, and funding for outside auditor compensation and any other independent counsel it employs. Audit committees must provide oversight of management’s risk assessment. A key responsibility is to assess the nature and scope of risks, including fraud risk, applicable to the organization in order to effectively minimize it.

When should the committee meet and with whom?

As a committee, it is important to meet and communicate with the team to understand everything that is happening. It is recommended, at the minimum, that an audit committee meet with management and the independent auditors at least two to three times a year. It is important to meet at the start of an audit to gain an understanding of everyone’s expectations of the work to be done and it is just as important to meet at the end of the audit to discuss the results and proper action that need to be taken based on the conclusion of the audit. It is considered a best practice to meet not only as a group with management and the auditors, but also individually with key members of each group to allow individuals to freely speak about issues they may otherwise feel uncomfortable bringing up in a group setting. These meetings help the audit committee assess management’s tone and uncover issues that would otherwise go left unnoticed.

How should an effective audit committee be governed?

An audit committee should adopt a formal written charter that is focused on the mission of the audit committee. A charter’s primary purpose is to create a practical roadmap that helps an audit committee achieve its goals. The charter should document the scope of the audit committee’s specific responsibilities, how those responsibilities are carried out and the audit committee’s membership requirements. In asking how an audit committee should be governed, it is important to take into consideration self-review. Conducting an annual assessment of the committee’s own effectiveness is important as there is always room for improving quality and performance. An audit committee should also remain current in regard to technical guidance. Engaging in continuing education of the ever changing audit principles and rules will help better prepare an audit committee for the future.

Conclusion

As the rules of the marketplace and accounting requirements continue to change and progress, more risks arise and the financial, economic and ethical pressures continue to mount. With these changes, audit committees’ responsibilities will only widen and take on even more significance in ensuring the health and longevity of the organizations and board they serve. Establishing an audit committee leaves a positive impact on your organization as well as increases public confidence from potential donors. It helps an organization in achieving its goals and meeting its responsibilities to the members, donors and the general public.

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