Importance of Documenting Loans

One issue that comes up more than it should is whether loans are properly documented.  Oftentimes a business lends money to its owners, or borrows money from its owners, without any note or even a memo documenting the loan!  This is not good.  When the auditors show up, oftentimes a transaction that nobody thought was taxable suddenly can be viewed as a dividend, or as additional payroll. 

It is very important when lending money from a company, or to a company (or really, whenever lending money), to document the term of the loan, the interest rate, a payment schedule, remedies for non-payment, etc.  While a carefully drafted loan agreement is ideal, even a short note that A lent B $X amount of money for Y years at Z interest rate is better than nothing. 

Another thing to consider is state lending rules, sometimes a loan that nobody thinks is a problem runs afoul of some state lending rule, and may even require that the lender register with the state before they can issue the loan.


Two Important Accounting Resolutions for 2019

Whether it is Q4 or Q1 it is always a good time to reevaluate your accounting systems and practices. What are some possible resolutions for 2019?

1. Use an accounting system.  This may sound obvious but it is surprising how many multi-million dollar revenue companies keep their accounting records in random excel spreadsheets or in 19th century style handwritten ledgers.  This may be ok when operations are still small (no, it's actually never ok), but it can be shockingly dangerous when revenue increases and suddenly there are millions of dollars at stake.

"Where is the record of that sale?!!" You definitely do not want to be asking this when it is time to prepare financial statements or tax returns, and you certainly don't want the answer to be that you think the bookkeeper recorded it somewhere on paper or on some spreadsheet that nobody can find right now.

2. Don't repeat mistakes. This may sound obvious but it happens so often and to devastating effect.  If yo…

Cash vs. Accrual Timing Mismatches

One issue that comes up from time to time, especially in closely held corporations, is the problem that the company may use the accrual accounting method, while the people who own the company are on the cash basis.  This can lead to timing mismatches that are costly to the business and the owners, if people are not careful.

The issue can arise because in many closely held corporations, business owners often pay corporate expenses with their personal accounts, and vice-versa.  Got an invoice for supplies?  I will put it on my personal credit card, reasoning that this is the most convenient way to handle it right now.

Accounting is not always tidy and organized, and people often think "well, I'll reconcile everything later."  The problem is that some items cannot be so easily reconciled later. 

What if the business owner takes out cash to pay for a business expense which is assumed but not invoiced until a subsequent tax year.  Let's say it is a service which is used n…