Thoughts during audit prep

When equity doesn’t tie, I snack.

Say one more stupid thing to me before the final nail is driven in!

Damn, I did a good job with this prepaid workpaper last year.

Wow. If I spend two and a half hours revamping this schedule to represent more precisely the nature of the 403(b) reconciliation, my variance disappears. Accounting really is about existential truth.


A visit to the dermatologist

My dermatologist, whom I see every December, is a soft-spoken, businesslike man in his middle years. His sole concession to conviviality is usually a Warner Bros. holiday necktie. Today, however, in his usual low-key manner, he asked several questions about what I do for a living. Looking at my back, he said, “What do the debit and credit mean?”

Me: “That’s the basic transaction in accounting. You debit something and credit something else, whenever you do anything.”

He: “And what made you decide to tattoo those on your back?”

Me, honestly: “I love bookkeeping, Doctor. I really, really do.”

I had had some coffee.

Me vs. the robots (a QuickBooks Online story)

I’m continually taken aback by the way QuickBooks Online does my thinking for me. As a self-taught bookkeeper/accounting person* who’s still learning, I prefer to do everything by hand and avoid shortcuts. QBO automates certain transactions, taking care of them behind the scenes in a way that makes the process invisible. This is something it’s always done, of course: I’m sure the first accountants to use it were horrified by all the tasks it automated (posting to journals?!). That’s always been the bargain with QB and QBO: give up control (autonomy, privacy, your own thought process) and let your life be made easier. In fact, it’s the bargain we make with every digital device and platform we use now.

For example, here’s how QBO writes off invoices: It applies a 100% discount to the invoice, decreasing Accounts Receivable and increasing Bad Debt. Although this is the end result that I, too, would arrive at, I would do it by means of a journal entry, not invisibly. It took me some time to puzzle out what QBO was doing.

Today I noticed another “advance” in this area. A customer, Suzie, who is billed monthly, always in the same amount of $135, made a $405 payment in September. Not having gotten a chance to put my hands in the books properly until today, I planned to sort through her account to find out why she overpaid, contact her, and apply the remainder as she desired. But QBO had already done everything for me. Although the deposit was made in September, the payment record shows that payment has been applied to October and November’s invoices as well. Thus, there is a temporal impossibility in the books: Suzie’s payment of September 4th paid her invoices of October 1st and November 1st as well.

What would I have done? I would have looked at the record, realized that Suzie was paying three months in advance, verified this with her, and applied the credit on her account to October’s invoice with an October date, then to November’s invoice with a November date. That’s two payment transactions plus a phone call. Am I glad I was saved all that time so that I could write this blog entry instead? I can’t decide.

* Yeah, I’m really not just a bookkeeper anymore, I’ve realized.

Nuclino makes me happy

I have a documentation compulsion and always have. When I started out as a bookkeeper, I wrote my own manual for every job and kept them in binders. (I called them Econo-Manuals, in honor of the first such manual I created—on green index cards, if memory serves—for a college job.) After losing one of those binders in a coffee shop, I was sufficiently spooked to move online. I used Wikispaces, a site which is now closing, for a number of years; on being informed of their closure, I was plunged into a panicked search for another wiki-like site on which to store my stream of instructions, thoughts, queries and other self-talk. I tried Zoho Wiki but was frustrated by its hit-or-miss formatting and homely appearance. Did I mention that I also have a formatting compulsion?

Then I lucked on Nuclino, which I am loving. It’s super-easy to use, easy to organize information on (with?), and handsome to look at. And they just came out with a Mac OS app! I’m so happy! Try it and let me know what you think. Then we’ll talk about Trello.

“You cannot say yes or no until you touch the books”

A very wise woman said this to me last week. It’s a great reminder that, as freelancers, we have the power to turn down gigs. Awesome little org doing terrific work, with a QuickBooks file that hasn’t been updated since 2015? You can say no. People you dig, a mission you love and a balance sheet so messy it makes your heart sink? You don’t have to say yes. Reflect on your personal capacity and your stress level. Do you want to be a hero, or do you want to have a personal life? It’s all up to you.

I also liked the tactile image she used—”until you touch the books.” I’ve said to clients, “I can’t answer that question because I haven’t really had my hands in the books.” Sometimes I wiggle my fingers for added effect.

How to pull cash-flow actuals

I like to do a monthly cash-flow projection for every client. (I don’t always, but I like to.) It’s really important to keep an eye on cash in small organizations, because a cash emergency can creep up and jump out at you like in a horror movie, except without any warning music. I’m sure that very soon you’ll be able to read all about that on my Cash Vs. Accrual page. Meanwhile, here’s how to pull cash actuals out of QuickBooks.

  1. Run a balance sheet for the closing month.
  2. Double-click on the bank total to drill down to a transaction report.
  3. Export that report to Excel.
  4. Copy the existing tab into a new one and format the data in the way that’s most comfortable for you (I’m Calibri 12 point, no bolds, 125% zoom). Delete the balance colum. Then sort it by transaction type.
  5. Delete all transfers, as long as they total zero.
  6. Open up the Cash Categories document you have previously prepared. As the name suggests, this lists the categories you want to show on your cash-flow report/projection. For example, under Cash In you might have Contributions, Program Service Revenue, and Grants; under Cash Out, Payroll first followed by all the expenses you want to differentiate.
  7. Proceeding from top to bottom down your list of transactions, copy and paste the appropriate cash category over the split field. You’re probably going to have to go back to QuickBooks to investigate individual deposits or anything that actually says “Split” in that column. If your organization does bill payments (instead, that is, of just recording expenses or checks), you’ll need to go back to QuickBooks to find the original expense account for those, too. Unless you know it off the top of your head!
  8. Sort and subtotal the finished list by Split.
  9. Hand-populate these totals in your cash flow.

Bonus tip. If you’re anything like me, you’re going to end up cutting-and-pasting over one of your Cash Category lines in a frenzy of categorizing actuals one day. Protect the sheet to avoid this!

The beauty of a payroll advance

I love my work. Best of all is when a situation that’s potentially confusing in “real life” gets boiled down into a single elegant journal entry in QuickBooks.

Say you’re working with a very small organization (our favorite kind!) with only two employees. One of these employees has asked for a $1000 advance on their payroll. The advance was approved by the board, and the employee is going to pay it back with deductions of $50 in subsequent paychecks. But nobody involved knows exactly what to do.

First, it’s best to create some kind of memo laying out the advance and its repayment terms, to be signed by the employee and their supervisor (here, probably the board chair). Next, call your payroll processor. Ask them to generate a paycheck for the employee for the gross amount, no payroll taxes withdrawn. Otherwise, the employee will be taxed twice on this thousand dollars—once when they receive the advance, and once again as they pay it back in increments of fifty dollars (each of which is deducted from the net paycheck after taxes).

Now, how do you book the advance? It would be incorrect to show it as a normal salary expense, because it represents an advance on salary that hasn’t yet been earned. It’s moving forward in time, so to speak, so it is more correctly shown as a balance-sheet transaction, along the same lines as a prepaid expense. Record it with a journal entry debiting (increasing) an Advance Payroll asset account and crediting (decreasing) your cash. If it’s part of a larger payroll, you can quite tidily tuck this into your usual payroll entry by adjusting the credit to cash—your processor’s report will give the correct amount—and adding in the Advance Payroll debit.


Recording a barter transaction

In the world of cooperative/radical/generally crunchy bookkeeping, you may find yourself wondering how to post a transaction that involves barter. Because until the revolution comes we still need GAAP.

Say for instance that Topher is dog-walking for web designer Merrie while Merrie designs Topher’s website. They agree that Topher will barter for the web design. Merrie invoices Topher for design services amounting to $200. In the meantime, Topher has provided $200 worth of dog walks, for which he invoices Merrie. You are Merrie’s bookkeeper. The name of the dog is not pertinent, but is Peppermint.

  1. Create an asset account called Bank Clearing. If possible, set this up as a “cash” or bank account in the general ledger.
  2. Post Merrie’s invoice to Topher. Two hundred dollars is thus recorded in revenue.
  3. Post Topher’s bill to Merrie. You have thus recorded a $200 expense.
  4. Pay Topher’s bill, using Bank Clearing instead of the usual cash account. This clears the liability from Accounts Payable and creates a negative ($200) in Bank Clearing.
  5. Receive a payment against Merrie’s invoice, again using Bank Clearing instead of cash. This clears the receivable and zeroes out Bank Clearing.

The fun of this comes when you are bartering your own bookkeeping services and therefore have to run through all of the above steps twice—once in your client’s books and once, in the other direction, in your own.

Depreciation vs. amortization

Taking a break from audit prep to note that depreciation is for tangible assets and amortization for intangible. Per Investopedia:

Amortization usually refers to spreading an intangible asset’s cost over that asset’s useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company’s income statement.

Depreciation, on the other hand, refers to prorating a tangible asset’s cost over that asset’s life. For example, an office building can be used for many years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

A small point, perhaps, but a useful one to know.

Those new accounting standards!

Last August, the Financial Accounting Standards Board issued a new standard on not-for-profit financial reporting. It’s super-technical (which is why Cathy Keeps Books hasn’t gotten it together to comment until now). But bookkeepers should know the following:

  • The new standard will affect financial statements for fiscal years 2018 or later (specifically, it covers fiscal years that start after December 15, 2017).
  • It updates the reporting of restricted funds, investments, and cash flow.
  • Under this standard, the distinction between time-restricted and purpose-restricted funds is going away.
  • Board-restricted funds are also no longer a thing.
  • The standard requires “enhanced disclosures” about investments and liquidity.

According to the published update (click accept), “The currently required distinction between permanent restriction and temporary restrictions has become blurred by changes in state laws that diminished its relevance and rendered that distinction less useful.” The only classes in restricted equity will now be Net Assets With Donor Restrictions and Net Assets Without Donor Restrictions.

Here’s a screenshot from the FASB’s nonprofit portal:


Other resources: AICPA coverage here, here and here. And AAF CPAs has some blog posts and a webinar.