Category: Accounting

In accounting, there are two basic types of accounts: assets and liabilities. Assets are things that you own, such as cash or equipment. Liabilities are things that you owe, such as a mortgage or debt.

Accounts payable and accounts receivable are two types of those accounts that businesses must manage. Nearly every business must deal with accounts payable (A/P) and accounts receivable (A/R). A/P and A/R are part of your company’s general ledger, where all accounting transactions are recorded for your review. 

Accounts payable lists all the bills you incur but have not yet been paid. It is money owed to vendors, contractors, or other parties that have provided goods or services to your business; 

Accounts receivable is the list of companies or individuals who owe you money (your customers). It is money owed to you by clients who have paid for services rendered by your business.

Because these two terms are so closely related, it’s common for people to confuse them. This article will give you a better understanding of the two terms.

What Are Accounts Payable?

Accounts payable is an account on your balance sheet representing money owed to vendors and suppliers. It includes the cost of operating your business: paying employees, utilities, and office supplies; buying inventory; and paying rent.

You may also owe money on credit card purchases or loans from banks or other financial institutions. 

In accounting terms, accounts payable are considered current liabilities because they are due within one year (or less). Existing assets include cash on hand and inventory; current liabilities include accounts payable and short-term loans.

In most cases, AP departments handle all business transactions involving goods or services purchased from outside vendors.

These transactions include issuing checks for invoices received from vendors, paying invoices electronically through financial institutions or ACH networks, and ensuring all payments are recorded correctly in accounting software such as QuickBooks Online or Xero.

How Accounts Payable Works

Suppliers usually submit invoices directly to an accounts payable department within your company. The invoice contains detailed information about what was purchased and how much should be paid. 

When you purchase goods or services from another company, you may have 30 days to pay for them.

If the business owner doesn’t pay within 30 days, they are considered late, and the supplier can apply penalties. In addition to late fees, interest charges may be used if payment is not made within 45 days of receiving the invoice.

The account payable process begins with vendors sending invoices to their customers, i.e., your company. They expect payment within a specific time — usually 30 days — after receiving the invoice.

You must record these invoices in your accounting system and send payment to your suppliers as soon as possible while complying with their terms and conditions, i.e., ensuring that all invoices are paid on time.

When To Use Accounts Payable

The accounts payable function is critical to any business’s accounting system. Accounts payable (A/P) is the account that tracks all of your company’s bills, including credit cards and loans.

The goal of A/P is to ensure that you only pay for expenses after they’ve been incurred. If you’re paying a bill after it’s due, you’re not following best practices.

There are some situations where you might want to pay an invoice early. However, these exceptions are rare and should only be used in exceptional cases.

Generally speaking, there are four main reasons why businesses will want to use accounts payable:

Preventing late fees: If your company pays its bills late, it could incur fines or penalties from its vendors — mainly if it owes them money for more than 30 days (the legal maximum). Using A/P software can help ensure that your company pays all vendors on time so that it never has to worry about being penalized for late payments again.

Tracking expenses. Your business may need to track the costs to stay on top of your cash flow. This is especially true if you’re a start-up or small business with many fixed costs and little capital. Tracking payments can help you manage your cash flow by letting you know how much money is coming in and going out at all times.

You are preventing fraud. By using accounts payable, you can ensure that no one within your company is stealing from the company by making unauthorized purchases. If someone wants to purchase without approval, they can’t use a check or debit card because they won’t have access to those funds unless they get permission from someone else in the company first.

You are managing cash flow. The other reason why businesses may want to use accounts payable is to manage their cash flow effectively. Suppliers often require payment before they deliver goods or services, so if you wait until after delivery to make payments, you’ll need substantial working capital to cover these expenses. Instead, businesses should keep their accounts payable low by making payments as soon as possible after receiving invoices from suppliers.

The best time to use accounts payable is when you receive an invoice from a vendor or supplier. You should enter the invoice into accounting software such as QuickBooks as soon as possible after it arrives so it doesn’t get lost in the shuffle.

Then, when it comes time to pay the bill, you can enter it again into QuickBooks as an expense or a reduction in accounts payable. This way, everything stays synchronized between the two versions.

Examples of Accounts Payable

Accounts payable lists all the money owed to suppliers, investors, and creditors. Here are some examples of accounts payable:

Suppliers: Invoices from suppliers who deliver goods or services on credit terms (typically 30 days). You must pay these invoices within the agreed period or risk losing valuable business relationships with them.

Rentals: This includes rent for office space and other facilities used by your business, such as equipment, property, and vehicles owned by third parties but leased out by them to your company on credit terms (typically 30 days). If rental payments are overdue by more than 60 days, landlords may consider terminating the lease agreement with you.

Services: Invoices for services provided to your business. This could mean anything from office cleaning to landscaping. It doesn’t stop there; the list is long from HVAC repair, repair and maintenance, and more.

Accounts Payable vs. Notes Payable

Accounts Payable (A/P) is a type of liability that occurs when a company buys goods and services from other companies. The company purchases these goods and services with its own money and must pay for them within a month to a year. This can include invoices for supplies, equipment, raw materials, and other items companies purchase on credit. 

Notes Payable is another type of liability representing money borrowed by a company from someone else and must be paid back.

Purchasing a building, obtaining a company car, or receiving a bank loan is all notes payable. Notes payable are commonly used as financing when cash is tight, and demand for goods and services is high. 

An agreement between two parties outlines terms for repayment of a loan or advance money.

Notes payable refer specifically to promissory notes issued by corporations and other businesses for financing purposes, such as mortgages and other loans taken out by companies with banks or other financial institutions. 

What Are Accounts Receivable?

Accounts receivable (A/R) are funds owed to a company from customers who have purchased goods or services on credit. A company’s AR balance is an important indicator of its health and viability.

The balance in accounts receivable includes the total amount owed by customers for products or services that have been provided but not yet paid for.

It does not include cash advances, which can be made to customers when they purchase goods or services on credit and are immediately paid back by the customer through automatic withdrawals from their bank accounts.

Businesses generate AR by selling products or services on credit to their customers. If a company sells a product or service on credit, it will invoice its customer at the time of sale.

This invoice lists the amount owed by the customer, along with payment terms such as net 30 days (30 days from the invoice date). The invoice also includes other information about the transaction, such as itemized details about what was sold and when payment terms began.

Accounts receivable are created when customers purchase goods or services from a company and pay for them later. The company records these purchases as sales on its books but does not collect the cash immediately. Instead, it waits until the customer pays the invoice before registering the payment as revenue.

How Accounts Receivable Works

When your customers pay for their goods or services using credit cards, checks, or electronic payments like PayPal, the money goes into a particular account set up for each customer. This account is called “Accounts Receivable.”

For example, if you have five clients who owe $5,000 each in accounts receivable, you have $25,000 in funds receivable total. You should list this total on your balance sheet under “Accounts Receivable.”

An excellent way to keep track of these accounts is using an Excel spreadsheet or software like QuickBooks Online. You can list all your outstanding invoices and track how much each client is.

When To Use Accounts Receivable

Accounts receivable are great for tracking the money you have coming in from your business. This can ensure that you meet your profit goals and have enough cash flow to continue operating without worrying about going bankrupt.

The most common reason to use accounts receivable is to track customer payments. You can use this information to determine whether your business is profitable and if you need to offer discounts or other incentives to encourage settlement promptly.

For example, suppose you discover that 15 percent of your customers are delinquent in their payments. In that case, you may decide it’s worth offering a discount for early compensation to incentivize them to pay sooner rather than later.

This can help reduce the amount of money that remains outstanding in accounts receivable and increase profitability for your company.

Any business owner must have a healthy balance between accounts receivable and accounts payable.

If you have too much money and no incoming cash, you will eventually run out of money and be forced to close up shop or declare bankruptcy. On the other hand, how can you pay off your bills if no money comes in from sales?

This is why it’s essential for small business owners to always keep an eye on their A/R and A/P balances so they know where they stand at all times.

Examples of Accounts Receivable

Accounts receivable are the money customers owe you for goods or services that you have provided to them.

Accounts receivable are a significant source of working capital for most businesses. Here are some examples:

A retail store has accounts receivable from customers who purchased goods on credit. The store keeps track of these amounts in its accounting records and pays interest on them until the customer pays in full.

A doctor’s office bills patients for medical services after they receive treatment. If the patient doesn’t pay within 30 days, the doctor can deduct the amount from his next bill.

A construction company bills clients after completing a project. It keeps track of these amounts in its accounting records and typically charges interest until they are paid in full.

Accounts Receivable vs. Notes Receivable

Accounts receivable and notes receivable are both a form of financing. The main difference is the underlying transactions.

Accounts receivable is a type of asset representing money owed to a business. It includes amounts owed by customers for goods or services already received and for which payment has been made on an invoice. Accounts receivable refer to debtors being accountable for compensation because they have agreed to pay. This means they have authorized payment and are responsible for paying the invoice in full upon receiving it.

A note receivable is a promise to pay a specific amount when it becomes due and payable.

A note receivable is similar to an IOU, except that a bank may issue it and have specific terms attached (such as interest) instead of an individual. A promissory note is usually in writing, so there is no confusion about what was promised when it was and how much it should cost.

Accounts Payable, Accounts Receivable, and Working Capital

In a business, cash is the lifeblood of operations. Without enough cash, you won’t be able to pay your bills and keep your doors open. Even if you’re a one-person operation with no employees, you’ll need cash to buy supplies and pay for services rendered by others.

Working capital is a business’s funds to invest in its operations, pay debts and other liabilities, or distribute to shareholders. Working capital is the difference between a company’s current assets and liabilities. 

The formula for working capital is:

Working Capital = Current Assets – Current Liabilities

In calculating working capital, you need to know the difference between current assets and current liabilities. Current assets include:

• Cash (cash on hand or in a checking account).
• Accounts receivable (money owed to a company by customers).
• Inventory (goods that are ready for sale).
• Prepaid expenses (items purchased in advance). 

Current liabilities include accounts payable (money owed to vendors or others), interest-bearing debt (loans with interest payments due), and taxes payable (federal income taxes).

Working capital is an essential factor in the success or failure of a business. It is the difference between what a business has and what it owes. Working capital measures how well a company uses its assets to generate earnings.

The amount of working capital a company requires depends on its industry and the stage of its life cycle. Companies in growth stages typically require more working capital than established companies that have reached maturity.

Working capital requirements increase as companies grow because they have more inventory to finance and more accounts receivable to pay off before receiving customer payment. In addition, companies are more likely to incur short-term debt when sales are increasing rapidly or if their products have high returns on investment (ROI).

Accounts payables and receivables likely make up the bulk of your current liabilities and assets, so effectively managing the two is key to having sufficient working capital.

Days Sales Outstanding and Days Payable Outstanding

Days Sales Outstanding (DSO) measures how long it takes an organization to collect its receivables. It is calculated by dividing the average accounts receivable balance by daily revenue.

The higher the DSO, the longer it takes to collect money owed to the company. This metric can predict future cash flow problems and may indicate that a company is having difficulty collecting customer payments.

To calculate your DSO, divide your total accounts receivables by the total number of credit sales. Then, multiply the results by the number of days for the corresponding period (month, quarter, year, etc.).

Days Payable Outstanding (DPO) are accounts payable days or invoice days. It measures how long it takes an organization to pay its suppliers. The same formula applies: divide the average total payables balance by the average daily payment.

Applying Days Sales Outstanding and Days Payable Outstanding

Days Sales Outstanding (DSO) is the days from selling goods or services to collecting cash from customers. Days Payable Outstanding (DPO) is the number of days between when a business receives payment for goods or services and when it pays its suppliers.

Determining DSO and DPO can help you understand how long your customers take to pay you and how long it takes you to pay your suppliers. The higher your DSO or DPO, the riskier it is for your company. You should work with your accounts payable team to reduce these numbers as much as possible if they are high. 

Which is More Important, Accounts Payable or Accounts Receivable?

Accounts payable is the money you owe to your suppliers. Accounts receivable is the money your customers owe you. Good account records are essential because they affect your business’s cash flow.

The answer to this question depends on your business.

For example, if you’re a small business owner with no debt and all cash in hand, you probably don’t need to worry about accounts receivable.

If you’re a large corporation with thousands of suppliers and vendors and millions in outstanding invoices, then accounts payable is a critical financial function that needs to be managed carefully.

In other words, it’s not an either/or situation; accounts payable and accounts receivable are essential.

Bookkeeping and accounting are two terms that are often used interchangeably. However, there are some differences between the two.

Bookkeeping is about recording your transactions to allow you to keep track of them. It’s about making sure that you have an accurate record of how much money came in and went out.

Accounting is the process of recording data, summarizing it, analyzing it, and communicating it. Accounting includes bookkeeping but is much more than just keeping track of transactions. 

This article will explain the difference between bookkeeping and accounting in detail.

The Function of Bookkeeping

The function of bookkeeping is to keep track of a company’s financial transactions. Bookkeepers record transactions by entering data into a computerized system. They take receipts, invoices, and other documents, enter them into the system and charge each item to the appropriate client. 

They use software that allows for just about any type of transaction to be recorded and categorized, making it easy to find any given information later on. Bookkeepers use software programs like QuickBooks, Sage, Xero, or other accounting software programs to keep track of the day-to-day transactions in your business.

These programs allow them to record every transaction accurately to create reports for their clients quickly.

Bookkeeping is essential because it keeps track of all the money coming into and going out of an organization’s bank account. It allows businesses to see exactly where their money is going to determine if there are ways they can cut costs here and there without affecting their bottom line too much.

For example, if your company has been spending too much on advertising, then maybe it’s time you started looking for cheaper alternatives like free online ads instead of expensive print ads that do almost nothing for your sales numbers.

After entering all of the transactions for a given period, bookkeepers post them to the general ledger. The public ledger is an electronic or paper system used by accountants and businesses to track all of their assets, liabilities, and equity at any given time. This provides businesses with a complete picture of their finances at any given time to make decisions about future expenditures.

The Function of Accounting

Accounting is a core management accounting function. The main goal of accounting is to provide financial information to decision-makers.

Managers use accounting information to decide how much money to invest in the business, when and where to borrow, and how much profit is generated from different products or services.

Accounting is also used to allocate assets and liabilities among owners and creditors. Accounting standards are designed to provide consistency in the way assets and liabilities are reported so that investors can compare companies’ performance over time.

Think of it this way; accounting is an essential part of controlling a business because it provides information about how well a company is doing financially and its financial position at any point in time. Because accounting reports are prepared on regular bases (usually monthly), they provide timely information that managers can use to make decisions quickly when they need it most.

Accounting involves more than just recording transactions — it also requires analysis, interpretation, and reporting those facts in ways that are useful for decision-making purposes. 

Bookkeeping records transactions with little research beyond whether or not they happened correctly according to predetermined criteria set forth by law or company policy (such as double-entry accounting systems).

Where Bookkeeping Ends, Accounting Begins

The lines between bookkeeping and accounting are often blurred. Bookkeeping is the recordkeeping function of a business, and accounting is the reporting part.

Bookkeeping typically involves recording transactions, summarizing them, and arranging them orderly. Bookkeepers may use software or even handwritten ledgers to keep track of the financial transactions of a business.

Accounting is a broader term that encompasses more than just bookkeeping. Accountants use information from all parts of the business to create financial statements that help companies make better decisions about spending and investing money.

Bookkeeping is necessary for every business, but it is only one part of the larger accounting picture. Bookkeeping is simply the process of recording transactions in a company’s financial records. Bookkeeping does not include analysis, which is where accounting comes in.

The Roles: Bookkeeper vs. Accountant

You may have heard these two terms used interchangeably, but there is a difference between bookkeeping and accounting. The role of both professionals is to keep track of the financial records of a business, but they differ in their level of expertise and the work they perform.

Bookkeeper

A bookkeeper tracks transactions and records them in a ledger or accounting software program. 

They also reconcile bank statements and record deposits and withdrawals from cash registers. Bookkeepers are typically responsible for maintaining financial records from day-to-day operations, such as tracking inventory, cash flow, and payroll expenses. 

Bookkeepers are usually not licensed professionals. They typically hold an associate degree or certificate in accounting from a community college or technical school. They may be certified through a professional organization like the American Institute of Professional Bookkeepers (AIPB).

A bookkeeper is responsible for the day-to-day accounting duties of a company. You will be working directly with the bookkeeping software and financial records in this role. The accountant role requires you to have more advanced knowledge of financial statements, taxes, and business practices.

Accountant

An accountant provides more in-depth financial analysis than a bookkeeper does. They evaluate an organization’s overall financial performance by examining its sales, profits or losses, assets, liabilities, and other aspects related to management decisions such as capital improvements or expansion plans.

An accountant often prepares tax returns for individuals or businesses, advises clients on taxes based on their income levels, prepares budgets for future planning purposes, and audits tax returns prepared by others.

Usually, an accountant is a licensed professional who has completed a four-year degree program in accounting and passed a state exam. Accountants are experts in tax preparation, auditing, and financial planning for businesses.

They may also advise clients on how to finance their businesses or grow their profits by investing in assets such as real estate or stocks.

An accountant performs many of the same tasks that a bookkeeper does. Still, they also provide advice on tax matters, which makes them more valuable than a simple bookkeeper who only records transactions and prepares financial statements. 

Bookkeeper Credentials

Bookkeepers are not required to have any specific education or certification to work in this field. 

However, some employers may prefer applicants with a degree from an accredited college or university or a diploma from an organization such as the American Association of Professional Bookkeepers (AAPB). 

The AAPB offers two levels of certification: Certified QuickBooks ProAdvisor (CQPA) and Certified QuickBooks Enterprise ProAdvisor (CQE). The CQPA requires at least two years of experience as a bookkeeper, while the CQE requires at least five years’ experience and passing an exam designed by Intuit.

Accountant Credentials

The primary difference between bookkeeping and accounting is that accountants must meet specific professional standards to become licensed.

To practice as an accountant in most states, you must obtain a bachelor’s degree from an accredited university with a major in accounting or a related field such as business administration or finance. 

It’s also necessary to pass two exams: one covering basic concepts and one covering more advanced topics. These exams are administered by the American Institute of Certified Public Accountants (AICPA). Once you pass these exams, you can apply for licensure in your state board of accountancy.

Bookkeeper or Accountant: Which Do You Need?

There are two types of professionals who can help you with your business finances: accountants and bookkeepers. Which one do you need?

The difference between bookkeeping and accounting is that bookkeepers keep track of the money coming in and going out, while accountants do more than this. Accountants are responsible for reporting the financial information to the IRS, investors, and other stakeholders.

Bookkeepers usually work on a smaller scale than accountants do. They may be self-employed or work for a small business or an individual. Generally, they keep track of receipts coming in and payments going out of a company or personal bank account. Their track information includes purchases made on credit cards, cash withdrawals, checks written and received, etc.

Accountants work in many different businesses, including large companies and government agencies. They may also work for individuals who have small businesses or need help keeping track of their finances.

Accountants help clients with tax preparation and tax planning and prepare budgets and forecasts for future years’ income. They may also perform audits on behalf of government agencies or other third parties like banks or insurance companies to ensure proper financial reporting has been done by those entities receiving funds from them.

Many small businesses and startups think that they should hire a bookkeeper if they can’t afford an accountant.

Most businesses need both.

You can’t have one without the other. A bookkeeper does not provide tax advice or strategic financial management advice that impacts your business’s long-term growth and profitability. An accountant does not collect payments from customers or write checks for vendors — those are all tasks a bookkeeper performs.

The Changing Landscapes of Bookkeeping and Accounting

The landscape of bookkeeping and accounting has changed drastically over the last few years. As technology becomes more advanced, it is essential to understand how these changes affect your business.

The changing landscape of bookkeeping and accounting makes it difficult to distinguish between them.

For example, accountants were responsible for preparing past financial statements and tax returns. Many accountants also provide bookkeeping services to their clients, complicating the difference between accounting and bookkeeping.

Merging of Bookkeeping and Accounting Functions

The distinction between bookkeeping and accounting used to be clear: Accountants performed audits while bookkeepers handled day-to-day recordkeeping tasks like processing invoices and payments and managing budgets.

However, as technology has advanced, many businesses outsource their accounting needs to third parties — including some bookkeepers who offer these services as part of their packages.

As a result, it’s becoming harder for consumers to tell whether they’re getting an accountant or a bookkeeper when they hire someone to handle their finances on their behalf.

Bookkeeping to Become Obsolete Slowly

The world is changing, and the way we do business with it. As a result, bookkeeping is quickly becoming obsolete.

Technology makes it easier than ever before to keep track of your finances. However, as technology advances, so does our need for more efficient systems.

Although there are still some industries that require manual bookkeeping, most businesses have found ways to automate their processes using software programs and cloud storage.

These programs allow you to track expenses, revenues, and other crucial financial information without hiring a bookkeeper.

We Are the Solution You Need

Bookkeeping and accounting are different but related functions. The principal difference between bookkeeping and accounting is that bookkeeper’s record transactions in a company’s books, while accountants are responsible for preparing financial statements.

Bookkeepers keep track of money coming into and going out of a business. They record information about bills paid and received, sales revenue and expenses, payroll transactions, and other details of the business’ finances. These records help accountants prepare financial statements for the company to manage its business operations.

Accounting involves more than just balancing ledgers and preparing financial statements. Accountants also prepare tax returns, assist with audits, set up accounting software systems, review budget reports, and perform other tasks necessary to control the financial side of a business.

Lucky for you, Finance Hire has a team ready to provide both services for you. We are even happy to schedule a call to ensure you have the right back-office structure and the right bookkeepers or accountants in the right seats.

Accountants work in various industries, including manufacturing, retail trade, government agencies, etc. They may be employed by corporations or nonprofit organizations or work independently as consultants offering services to businesses and individuals.

Accountants prepare accounting records for businesses or individuals, analyze financial statements and tax returns, monitor budgets and forecasts, and advise clients on improving their finances or meeting regulatory requirements.

There are so many different specializations and qualification levels within accounting, let alone external factors like the state you live in. We’re here to provide you with some clarity and hopefully help you find out how much an accountant makes in the U.S.

What It Costs to Hire an In-House Accountant

An accountant is an integral part of any business. They help you identify your financial strengths and weaknesses, and they can help you develop strategies to improve your bottom line. 

 The cost of hiring an in-house accountant can vary widely based on several factors. For example, you’ll pay more for someone with particular expertise in a specific area, such as tax law or auditing. And it’s common for companies to pay bonuses to accountants who meet their goals or exceed expectations.

According to the Bureau of Labor Statistics (BLS), the average annual salary for accountants is $77,250 per year. However, salaries vary widely depending on education, experience, and location. A certified public accountant (CPA) earns more than a non-CPA and will have additional responsibilities such as advising clients on financial matters.

This figure only reflects the average across all industries and companies — your salary will depend on where you live and which accounting firms are available in your area. You’ll also need to factor in several other expenses when considering whether to hire an in-house accountant.

For example, you’ll pay more for someone with particular expertise in a specific area, such as tax law or auditing. And it’s common for companies to pay bonuses to accountants who meet their goals or exceed expectations.

Finally, when it comes to how much accountants make, you’ll need to consider how much time they’ll spend working with your business. If they have to spend hours on the phone or in meetings with clients, those hours could eat into their billable hours and increase costs for your business.

Hiring an in-house accountant is a big decision, and it’s not the right fit for every business. It can be helpful to start by weighing the pros and cons of hiring a dedicated bookkeeper.

Pros of Hiring a Full-Time In-House Accountant

• Save time and money by outsourcing bookkeeping and accounting tasks to someone.
• Avoid paying high fees for outsourcing accounting duties.
• Reduce stress by having one person handle all financial matters for your business.
• Gain access to valuable information about your business that you may not be able to find on your own or through outside resources

Cons of Hiring a Full-Time In-House Accountant

• Hiring someone with the right experience and qualifications may also be challenging due to the high demand for qualified accountants.
• Hiring an employee is expensive, especially if you do not have the cash flow to cover their salary. 
• Another downside of hiring a full-time accountant is the lack of flexibility.
• Some companies, especially startups, need someone who can occasionally work on short notice.

State by State Breakdown

Accountants is one of the most in-demand professions in the United States, with over 135,000 openings for accountants projected each year. The Bureau of Labor Statistics also reports that the average salary for accountants will be $77,250 in 2022.

The table below breaks down how much it costs to hire an in-house accountant across the United States. The figures below are based on average hourly rates reported by ZipRecruiter.

Remember that these are averages, and your specific situation may vary. For example, an experienced professional with a high level of expertise may command a higher salary than someone with less experience or a more specialized skill set.

According to ZipRecruiter, the state of Washington has the highest average annual salary at $60,451 per year, while Maryland comes in second with $59,427 per year, and Nebraska rounds out the top three with$58,213 per year.

Here is a quick breakdown of the top ten states in terms of average annual accounting salaries in the United States:

Washington – $60,451

Maryland – $59,427

Nebraska – $58,213

New York – $57,903

Virginia – $57,449

Colorado – $56,545

South Carolina – $56,388

New Hampshire – $56,000

Delaware – $55,623

California – $54,189

The bottom ten states are in terms of average annual salary for accountants:

Louisiana – $46,626

Kansas – $46,435

Iowa – $45,930

Alabama – $45,845

New Mexico – $37,409

Kentucky -$44,442

Florida – $44,244

Arkansas – $43,663

Mississipi – $43,501

Illinois – $43,425

Is Hiring an In-House Accountant Right for You?

If you’re a small business owner, you’ve probably wondered at some point whether hiring an in-house accountant is the right move. After all, it’s not cheap to have someone on your payroll. But when it comes down to it, there are many advantages to having your in-house accountant. Here are some things to consider:

You’ll save money. If you hire a full-time accountant to handle your books, they will likely charge less than the fees charged by an outsourced firm. Plus, you won’t have to pay for extra travel time or expenses incurred when they need to collect information from multiple locations.

You’ll have more control over your business. You’ll be able to focus on running your business instead of worrying about how much money it makes or loses each month. Plus, if something goes wrong with your accounting system — such as being hacked — it can be easier to fix issues internally than if they were handled by another company or individual outside of your organization.

You’ll get more skill and experience. If you’re running a small business, the chances are that you have other responsibilities besides bookkeeping and taxes. If your accountant can handle these tasks and other administrative duties like payroll and benefits management, then hiring one makes sense. But if you need someone who’s skilled in business analysis and forecasting or has expertise in specific areas like tax planning or compliance requirements for particular industries (such as health care or construction), hiring someone with those qualifications might be worthwhile.

You’ll have someone who knows your business. An in-house accountant knows everything about your business — from how much money you make each month to which customers are profitable and which ones aren’t — because they work directly with you daily. They know what questions to ask when something goes wrong and can help resolve issues immediately.

Hiring an in-house accountant can be a smart move, but it’s not right for every business. One of the biggest obstacles to hiring an in-house accountant is finding the right person for your company. If you want to experience someone, you’ll pay more than if you hire a recent accounting graduate (though they may be cheaper). If you want someone who knows your industry well, it takes time to find them and train them on your operations and systems.

If you can’t afford this investment of time or money, then hiring an accounting firm or online accounting service makes sense — especially if your business is brand new or small. However, if your company has been around for several years and has grown significantly over those years (or expects to), then hiring an in-house accountant could be beneficial in the long run.

What It Costs to Contract With a Traditional Accounting Firm

 The cost of hiring an accounting firm depends on various factors, including the size of your business and the type of accounting services you need.

Most small businesses hire an accountant to prepare their tax returns and help them keep track of their finances. 

Accounting firms charge more for more complex tasks, such as business valuation, management advisory services, and forensic accounting investigations.

The cost of a professional audit depends on many factors:

• What type of audit do you need?
• How much work needs to be done by outside professionals
• How much work needs to be done by in-house staff 

The pricing structure for traditional accounting firms can be pretty complicated. However, there are some basic principles that you should follow when determining the cost of working with a formal accounting firm.

The most critical factor in determining how much it costs to contract with a traditional accounting firm is how they charge their clients. There are two major fee structures that accountants use:

Time-based billing: With time-based billing, accountants charge clients by the hour or by the project. The more complex your business is, the higher your bill will be — which means that if your business is more straightforward, you’ll pay less than someone whose business requires more time and effort to keep track of.

Fixed fees: Fixed fees are based on the number of services provided rather than how long it takes to provide them. Fixed costs usually include an hourly rate plus additional charges for specific services like tax preparation or bookkeeping.

The following are some standard fees that accounting firms may charge:

Accounting fees: This covers professional services rendered by accountants and bookkeepers to keep your books and records up-to-date and accurate. These fees usually run between $75-$350 per hour, according to AccountingCoach.com. Some accountants are willing to work hourly, while others charge flat fees for specific tasks such as filing taxes or preparing financial statements.

Is a Traditional Accounting Firm Right for You?

Accounting firms can be expensive, but they are worth the cost. You’ll need to determine how much you’re willing to spend on accounting services before you start looking for a firm. The following factors will help you determine your budget:

How much money are you making now? If you’re starting and don’t have much revenue, working with an inexpensive firm might make sense. But once your business starts making money, you might want to invest in a more experienced accountant who can help guide you through the rest of your journey.

How complicated is your business? Small businesses with simple needs will pay less than those with complex conditions such as international operations or multiple locations across several states. If your business requires specialized expertise, expect to pay more for certain services (like payroll or tax preparation).

What kind of support do you need? Accounting firms offer different service levels depending on how much time they spend working on your books each month (or quarter). An hourly fee means that they’ll charge by the hour for every task they perform (e.g., reviewing invoices)

Accounting firms are highly trained professionals whose valuable skills, but they may not be the right fit for every business owner. Here are some things to consider when deciding whether a traditional accounting firm is right for your business:

Pros of Working With A Traditional Accounting Firm

What makes these firms different from other accounting firms? Here are some things you should know before deciding whether you need a traditional accounting firm:

They offer a full range of services. Traditional accounting firms can help you with bookkeeping, tax planning, business valuation, and estate planning. If you want someone who will be there for your future needs, this is the kind of firm that will help you get there. They’re experts in their field. They have years of experience working with small businesses like yours, so they know what issues may arise and how best to deal with them.

They have a network of resources at their disposal. The bigger the firm, the more available resources, including other accountants who specialize in different areas (such as tax planning or employee benefits). This means that when you need help with something, someone else within the firm is already dealing with it.

Cons of Working With A Traditional Accounting Firm

Here are some things to consider before deciding whether or not a traditional accounting firm is right for your business:

Accounting firm services are expensive. A full-service accounting firm will charge anywhere from $150 to $300 per hour for most services, and that doesn’t include the cost of their software subscriptions and licenses. Those costs can skyrocket if your company has proliferated or needs specialized tax planning and preparation.

Accounting firms can be slow to respond to requests from clients. Accounting firms are typically staffed with several employees who take care of dozens or even hundreds of clients. When you call with questions, you may find yourself waiting on hold for long periods or dealing with an inexperienced staff member who doesn’t know how to answer your questions correctly.

Accounting firms aren’t always prepared to handle emergencies. If there’s a problem with your taxes or finances that needs immediate attention, it’s unlikely that someone at an accounting firm will be able to help you right away —

In addition, A small firm can offer more personalized service than a large one, but it might not have the resources to handle larger projects or deal with complicated tax issues. A large firm might be able to handle complex accounting issues quickly and efficiently, but it may lack the personal touch that a small firm can provide.

What It Costs to Work With an Online Accounting Service Provider

Online accounting services are increasingly becoming more affordable and accessible to small businesses, which is excellent news for business owners looking for a better way to manage their finances.

When you work with an online accounting service, you keep your costs down because there’s no need to pay benefits or payroll taxes, and they’re able to handle your books remotely, so there’s no overhead associated with their office space.

Online accountants can handle everything from general bookkeeping to tax preparation and everything in between.

The best online accountants, like Finance Hire also offer a free initial consultation where they’ll talk through your needs as a business and help you decide which service is perfect for you. That’s something that traditional in-house hiring processes just can’t do.

Is an Online Accounting Service Right for You?

One of the most significant advantages of working with an online accounting service provider is that they can often offer more affordable services than traditional accountants. There are fewer overhead costs and administrative fees when you work with a company that has no office space or other physical assets. 

There are still some fees associated with using an online accounting service provider. For example, some companies charge a monthly fee for their services, while others charge based on the type or size of your business. Additionally, some providers may charge additional fees for certain services such as bookkeeping or payroll management.

Here are some things to consider when deciding if an online accounting service is suitable for you:

• You don’t have time or expertise to manage your bookkeeping.
• You don’t have the resources to do it yourself.
• You want someone else to do it all for you and the convenience of having everything done automatically.
• You want someone who can help answer questions and advise how to run your business better.

There are several advantages to using an online accounting service:

Online Accounting Services are convenient. Online accounting services are convenient because they don’t require additional hardware or software beyond standard internet access. You can access your accounts anywhere with an internet connection and a web browser.

Online Accounting Services Offer 24/7 Access. One of the most significant advantages of using an online accounting service is that it is available 24 hours a day, seven days a week. You can access your financial data at any time and from anywhere. You no longer have to wait until the end of the day or week to see how your business did during that period.

Online Accounting Services Are Affordable. Another advantage of using an online accounting service is that they are usually much less expensive than traditional accounting firms. This is because there are no storefronts or office space to maintain, which reduces overhead costs considerably. Most online accounting services charge by the hour or by the project rather than charging for every transaction processed by your business, which means you don’t have to worry about paying for transactions that don’t affect your bottom line.

 If you are a small business owner with limited accounting knowledge, an online accounting service may be the answer for you. The best online accounting services offer a wide range of features to help you manage and grow your business.

Bookkeeping is an essential part of running a business. Without records and data, it’s hard to understand how your business is doing financially.

Bookkeeping is very diverse, and professional bookkeepers maintain the financial records of businesses and companies using advanced accounting and financial software. This includes handling payroll, preparing bank deposits, verifying receipts, preparing invoices, and more. 

The nature of the job enables qualified individuals to work from home or part of an in-house time. This guide will help you understand which option is right for your business and how much it will cost you.

What It Costs to Hire an In-House Bookkeeper

To hire a full-time in-house bookkeeper at the national average hourly rate would cost approximately $45,560 per year in salary plus benefits, according to the Bureau of Labor Statistics (BLS). If you typically pay overtime and your bookkeeper works more than 40 hours per week, the actual cost of hiring her can be substantially higher. However, the average Bookkeeper salary range in the United States, typically falls between $39,887 and $50,984, according to salary.com. 

When you’re looking for a bookkeeping service, you’ll find that pricing can vary wildly. The cost of hiring an in-house bookkeeper depends on how much work you want them to be doing and what kind of services they’ll be providing. Some bookkeepers will charge by the hour, but it’s more common to see some sort of retainer or a flat fee. 

For example, a small business can pay a monthly fee to have their books kept up to date, or they can pay an annual fee for a comprehensive set of services. A large business may have its own in-house accounting team and may also choose to use one or more outside bookkeepers at different points throughout the year to help keep things organized and running smoothly.

There are also many different kinds of bookkeepers out there who each offer their own specific services. For example, a controller is more senior than an entry-level bookkeeper and will spend more time reviewing financial reports and doing analyses. An accounting manager will usually be able to work directly with clients without having to consult with the company’s higher-ups for approval on certain things. 

Hiring an in-house bookkeeper is a big decision, and it’s definitely not the right fit for every business. It can be helpful to start by weighing the pros and cons of hiring a dedicated bookkeeper.

Pros of Hiring a Full-Time In-House Bookkeeper

• Your bookkeeping will be done by someone who is 100% devoted to your business.
• You have access to a bookkeeper whenever you need one.
• Your bookkeeper is constantly working on your books, resulting in more accuracy and up-to-date information than you could likely get if you tried to do it yourself.

Cons of Hiring a Full-Time In-House Bookkeeper

• You have to pay your bookkeeper even if they don’t have enough work to do all day.
• You must provide benefits for your bookkeeper, which can be costly depending on what you offer.

State by State Breakdown

In addition to work experience and level of education, education level, and location plays a key factor in bookkeeper salaries, and this varies from state to state. 

The table below breaks down how much it costs to hire an in-house bookkeeper across the country. The figures below are based on average hourly rates reported by ZipRecruiter.

Keep in mind that these are averages and your specific situation may vary. For example, an experienced professional with a high level of expertise may command a higher salary than someone with less experience or a more specialized skill set.

According to ZipRecruiter, Washington is the state with the highest average bookkeeper salary in the United States. Bookkeepers in Washington earn an average annual salary of $53,008 or an hourly rate of $25,48.

New York has the second-highest average bookkeeper salary in the United States, with an average annual salary of $50,288 or an hourly rate of $24.15. New Hampshire comes in third, with an average annual salary of $48,607 or an hourly rate of $23.37.

Here is a quick breakdown of the top ten states in terms of average annual bookkeeper salaries in the United States:

1. Washington – $53,008
2. New York – $50,288
3. New Hampshire – $48,607
4. California – $47,380
5. Massachusetts – $46,260
6. Vermont – $45,854
7. Wyoming – $44,922
8. Hawaii – $44,818
9. Idaho – $44,554
10. Maine – $43,921

The bottom ten states are in terms of average annual salary for bookkeepers:

1. New Mexico – $39,179
2. Oklahoma – $38,946
3. Florida – $38,321
4. Kentucky – $38,087
5. Arkansas – $37,409
6. Michigan – $37,388
7. Mississippi – $37,369
8. Illinois – $37,206
9. Missouri – $36,603
10. North Carolina – $34,076

Is Hiring an In-House Bookkeeper Right for You?

You need to know a few things before you hire an in-house bookkeeper. 

First, it’s important to weigh the pros and cons of hiring a full-time employee. Hiring an in-house bookkeeper includes having someone available regularly, the added security of knowing your books are being handled by someone reliable, and the ease of working with one person instead of multiple people at an agency or accounting firm. 

The downside is that hiring a full-time employee can be expensive if you aren’t fully utilizing their time and skills. You’ll also have to manage them and find ways to keep them motivated and productive.

It’s also important to consider your company’s stage and what it might need from its financial services provider. A small business may not have enough work to justify hiring an in-house bookkeeper. In contrast, a larger business might not want the additional overhead of having an extra employee on its payroll. 

You should also consider whether or not you have enough money to hire someone full-time and whether or not you have enough work for them to do.

What It Costs to Contract With a Traditional Bookkeeping Firm

When you hire an in-house bookkeeper, your expenses will be limited to the salary of that one person. A full-time bookkeeper will cost between  $39,887 and $50,984 a year. You’ll need to factor in additional expenses such as worker’s compensation insurance and benefits, which can add up to 20% to 30% of total salary costs. 

Another option for small businesses is outsourcing your bookkeeping to a traditional bookkeeping firm. The benefit of this approach is that you get access to a wide range of bookkeepers and accountants who have different areas of expertise and can help with bookkeeping, from basic data entry to more advanced financial reporting.

Finding a traditional bookkeeping firm won’t be an issue, as they are located all over the US. They are often a small group of specialists that serve local geography.

If you decide to contract out your bookkeeping services instead, the annual costs can vary significantly depending on the scope of the work and the amount of time required to complete the job. Some firms charge a flat monthly rate for their services; others may bill by the hour or based on the number of transactions processed.

A traditional bookkeeping firm may also require a set-up fee, especially if you’re transferring from an in-house system, and may charge a monthly maintenance fee.

When you hire a traditional bookkeeping firm, the normal process is that they’ll offer you a quote upfront, giving you an estimate of how long it will take them to do your books. If your bookkeeping requirements are much more complex than initially estimated, they may also charge extra fees, and your costs might sike considerably.

Is a Traditional Accounting Firm Right for You?

If you’re a small business owner, you’ve no doubt noticed how easy it is for your accounting to get out of hand. You may be wondering whether it makes sense to hire an in-house bookkeeper or contract with an external bookkeeping firm. In our experience, we’ve found that the latter is by far the better option. 

If you want your bookkeeping needs to be taken care of without any hands-on management, then outsourcing is the way to go.  In the case that you have simple books with few transactions that don’t require any specialized expertise, it may be most cost-effective to contract with a traditional bookkeeping firm that can give you a few hours each month at an affordable price.

Even if you do have specialized needs, the right outsourcing firm has access to individuals with your industry expertise.

Contracting with the leading remote accounting firm also saves you money. You typically save about 40 percent of their payroll costs by hiring an in-house bookkeeper or accountant. You don’t pay for benefits, vacation time, or sick days.

On the surface, contracting with a new-age accounting firm has many advantages. You can hire an expert in the field, and you can work together to decide on a flat fee that will cover all your needs. 

What It Costs to Work With an Online Bookkeeping Service Provider

Hiring an in-house bookkeeper seems like the most cost-effective way to keep track of your finances. But there are several hidden costs that you may not have considered that make an online bookkeeping service a much more attractive alternative.

Online bookkeeping services are a great way to save money on your business’s bookkeeping and accounting needs. When you work with an online bookkeeper, you keep your costs down because there’s no need to pay benefits or payroll taxes, and they’re able to handle your books remotely, so there’s no overhead associated with their office space.

Online bookkeepers can handle everything from general bookkeeping to tax preparation and everything in between.

The best online bookkeepers, like Finance Hire also offer a free initial consultation where they’ll talk through your needs as a business and help you decide which service is perfect for you. That’s something that traditional in-house hiring processes just can’t do.

Is an Online Bookkeeping Service Right for You?

If you’re considering hiring a bookkeeper, you might be wondering if an outsourced accounting firm is right for your business. An online accounting service can help your business in many ways. It means you won’t have to pay a salary and benefits to an in-house accountant. Instead, you’ll be spending a get the benefits of a full-time bookkeeper at a fraction of the cost.

This means that when times are good, and you don’t need as much attention from them, you don’t have to worry about paying for their downtime. It also means that when times are busy, and you need more help, they are ready to keep up with your company’s growth, without the need of hiring more and more bookkeepers.

In addition to saving money on payroll, an online bookkeeping service will save you time. You won’t have to train anyone or answer questions—you just hand over your paperwork, and they take care of everything else. You can focus on what matters: running your company.

The chart of accounts structure is the skeleton of your accounting system. It’s the way you organize your finances and categorize transactions, and it’s a key component of your accounting software.

While not every business has the same chart of accounts, some best practices can help your accounting processes run more smoothly. 

If you haven’t set up your chart of accounts yet, or if you’re looking to streamline an existing one, here are some guidelines to follow.

What Is the Chart of Accounts, and Why Is It Important?

A chart of accounts lists all the reports that make up your business’s financial records. It groups them into categories, like assets and liabilities, to see what you own (assets) and what you owe (liabilities). It also lists your income and expenses in separate categories to help you track how much money your business is making or losing.

Your chart of accounts helps keep your accounting books in order by tracking specific transactions, such as payroll, expenses, inventory costs, and other transactions.

These accounts are then used to prepare your business’s financial statements. You can use accounting software to automatically generate a chart of funds based on your business type.

Accountants commonly use the chart of accounts to prepare financial statements. These financial statements are then used by various stakeholders, such as investors and creditors, to analyze a company’s finances and make business decisions about whether or not to invest or extend credit to it.

The chart of accounts is important because it is the foundation for all your other financial reports. It drives what shows up on your income statement, balance sheet, and cash flow statement. You’ll want to ensure that you have all the accounts that apply to your business set up in the correct order.

How should you use the Chart of Accounts?

• To categorize every transaction in your business.
• As a tool for analyzing past performance and planning future strategies
• To identify where you are making money and where you are losing money

Use Chart of Accounts Best Practices

A well-designed chart of accounts allows management to make decisions based on accurate reports. Inaccurate or poorly categorized statements can lead to reporting issues and may indicate that management needs to change its bookkeeping procedures.

A “numeric” structure is a “numeric” structure, meaning each account has a unique number assigned to it. These are often three to five digits long, with different categories posted with varying ranges of numbers. Anyone looking through the general ledger can find every transaction for a specific account.

A good chart of accounts has a numbering system that allows new account numbers to be added easily between existing ones without renouncing all subsequent account numbers. This makes it easy to add unique or detailed account numbers without disrupting existing reporting processes. 

Which type is right for your small business depends on your industry and business model, but there are some common patterns you can use to set up your chart of accounts. A typical accounting system uses the following:

1000’s: Current asset accounts, including all cash accounts (savings/checking accounts) and accounts receivable, prepaid, and fixed assets.

2000’s: Liabilities including anything in accounts payable, accrued expenses, notes payable, and other liability accounts.

3000’s: Owner’s equity accounts, including common stock and preferred stock and any funding-related capital.

4000’s: Income statement accounts that cover sales and revenue.

5000’s: Cost of revenue accounts, including support, hosting expenses, and third-party transaction fees.

6000’s: Accounts for operating expenses from salaries, rent, etc.

7000’s: Other income from interest, rent gains on the sale of assets, and gains from foreign exchange transactions.

8000’s: Other expenses from income taxes and interest.

A number like 1000 could represent an asset account. Subaccounts under 1000 might start with 1001 (a checking account), 1002 (a savings account), or 1003 (a second savings account). You can create subaccounts under 1001-01 for a checking account for business expenses or 1002-02 for your savings account where you save money for taxes.

Align Your Chart of Accounts With How You Want to View the Business

Every business is different, and your chart of accounts must reflect how you want to view your business. If you’re unsure what the best structure for your chart of accounts is, consider how you want to see your business. You’ll probably have one income account if you wish to view your business by location. If you’re interested in seeing expenses by department, you might have one expense account.

It’s also a good idea to consider how many different reports you’ll be running. Having just a few categories might be acceptable if you only need a few standard reports like a balance sheet and an income statement. On the other hand, if you need more complex information or if the nature of your business requires a systematic analysis of different segments, then breaking up your chart of accounts into more subcategories will be helpful.

It’s essential to align your chart of accounts with how you want to view the business. When you know what metrics are critical to your business, you’ll better understand how to categorize expenses in your accounting system. This will give you better data and improved reporting.

If you’re not sure where to start, here’s an example chart of accounts for a small company:

1000 Cash Assets

1100 Accounts Receivable Assets

1200 Inventory Assets

1400 Investment Accounts

1500 Fixed Asset/Depreciation

2000 Accounts Payable

2100 Credit Card

2300 Sales Tax Payable

2400 Accrued Expenses

2500 Current Portion of Long-Term Liability Liabilities

2700 Long-Term Liabilities Liabilities

Follow GAAP but Focus on the Business

You know that it is essential to follow the Generally Accepted Accounting Principles (GAAP) when creating your chart of accounts. But it’s also true that your chart of account structure has to be tailored to your business.

The GAAP-approved guidelines provide a framework for structuring a chart of accounts, but they shouldn’t be used as a checklist.

Your goal should be to create a structure that makes sense for your company and that you can use over the long term. Review your list regularly, make sure it is designed for long-term use, and don’t spend too much time tweaking an account that isn’t critical to your business’s goals.

Scalability and Flexibility Are Key

When you’re setting up your chart of accounts, it’s best to plan. You want to build something that will grow with you, so you want to make sure your structure is scalable and flexible. This will help you keep your records organized as you grow and expand.

You’ll also need to decide how detailed your chart of accounts will be. Some companies opt for a simple structure with fewer accounts, while others may have a highly complex system with hundreds of accounts.

The size and complexity of your business will help determine the best strategy for you.

Logical Account Numbering

Accounting is all about organization, so having a systematic way of numbering your accounts. One easy method to use is to give your accounts numbers based on the account type and its order in the Chart of Accounts.

For example, suppose you have three different types of revenue accounts (e.g., sales, service fees, and other revenue). You could number them 100, 200, and 300, respectively—and you’d number the individual accounts within these categories accordingly. So your sales accounts might be 101, 102, and 103; your service fee accounts 201 and 202; and so on.

Having your accounts ordered this way makes it easier to find things in reports because they’ll be grouped visually—for example, when you’re looking at an income statement.

Standardization Will Save the Day

One of the most important benefits of setting up your chart of accounts correctly is that it will be easier to pull accurate reports later. If you have a standard numbering system, you can sort your accounts by number and quickly find what you’re looking for.

This is especially helpful if you have multiple people working on your books since they’ll all know which account to look in when they need information. It makes things easier for everyone, and it’ll save you time and money down the road when you don’t have to hire someone who knows how to fix messed-up charts of accounts.

When you standardize your chart of accounts, you’re making your accounting and bookkeeping processes more straightforward, accurate, and stressful.

Your information will be more organized, which means everyone can access it. If a person leaves your organization, another is trained to step in seamlessly. If you switch software platforms, the transition will go much more smoothly.

Make Department Tagging a Top Priority

For most companies, having a helpful chart of accounts structure depends on being able to tag each transaction with the appropriate department. Many organizations have adopted a “tagging” system for transactions, which allows them to create reports that would otherwise be impossible or very difficult to make.

Unfortunately, this tagging is done manually and by different people in different ways for many companies – resulting in inconsistent reporting. Ensure you have a strategic and consistent approach for tagging.

To ensure that you’re getting the full benefit from your chart of accounts structure and your reporting capabilities, it’s best to prioritize department tagging. It might be helpful to start by creating a list of all the departments in your organization and then brainstorming how each type of transaction could be tagged based on its primary purpose.

Nail Down Cost of Revenue vs. Operating Expense

The first step in creating a chart of accounts is to nail down your cost of goods sold (COGS) or cost of revenue and separate it from operating expenses.

COGS includes all costs you incur to deliver your goods or services, including labor, materials, shipping, and overhead.

Operating expenses are everything else that’s not COGS. This includes rent, office supplies, marketing costs, accounting fees, travel, payroll for non-production employees, and professional development for non-production employees.

The more information you can track in your COGS account, the better. For example, if you make products and sell them to customers, you should follow the billable hours of your production team and the cost of materials used per product. You can also track shipping and overhead as line items in the COGS account.

Once you have your COGS sorted out, it’s time to start building out the rest of your chart of accounts. The best way to do this is to think about how you plan on using financial reports as part of your business management process.

A Clean General Ledger Helps Business Scale

There are many ways to organize your chart of accounts. The most important thing to remember is that the chart of accounts is a tool for you to use, so you should set it up in a way that helps you understand your business’s financial performance.

One thing to consider is whether to include account numbers and how long they should be. Account numbers are used in accounting software and can save time searching for specific accounts. They also help ensure the correct account is selected when entering transactions because the name alone might not be enough to tell the difference between similar accounts.

One of the best ways to successfully use a chart of accounts is to follow certain best practices established by similar businesses. These practices include:

• Funds should be in alphabetical order.
• Assets should be listed first, followed by liabilities and then equity.
• Accounts used more often should be assigned lower account numbers than those used less often.
• The use of subaccounts is encouraged.
• Account numbers should be able to accommodate future growth by including extra digits at the end of the number.
• Each new account added should have a unique account number; do not skip numbers when adding funds to an existing group.

A well-designed chart of accounts allows management to make decisions based on accurate reports. Inaccurate or poorly categorized statements can lead to reporting issues and may indicate that management needs to change its bookkeeping procedures.

Growing a SAAS business is exciting — especially when you see all the cash rolling in. Knowing how to account for this revenue can be tricky.

Do you account for these invoices and funds as they are received, or do you allow a buffer period? While these questions might seem straightforward at first glance, a couple of other factors can affect revenue recognition.

You must understand when your company recognizes revenue. If your account for the money from your contracts as revenue inappropriately, you’ll risk having an inaccurate understanding of your company’s actual profits.

If you’re in the software-as-a-service (SaaS), you’ll want to understand how to manage SaaS revenue recognition properly. You might already know that revenue recognition is tricky, challenging, and complicated. 

However, the complexity of the topic doesn’t mean it shouldn’t be done correctly. This post will cover everything you need to know to manage your SaaS revenue recognition for your startup.

What Is Revenue Recognition?

Revenue recognition is the process of accounting for revenue in the period it’s earned. It is essentially when revenue is recognized and brought into the company’s income statement.

From a more technical standpoint, it involves evaluating which transactions should be recorded as sales and when they should be recorded.

Revenue recognition can be complicated for SaaS businesses because they usually provide software as a service instead of a single product. They also offer subscription services that are typically paid regularly. Because of this, it’s difficult to determine when revenue has been earned and can be recognized.

Proper revenue recognition is essential because it has a significant impact on how much money you’re bringing in, how well you’re doing compared to past months/years, and what kind of information investors can see about your startup. For this reason, revenue recognition is essential for understanding how well a business is doing financially.

To help you understand how revenue recognition can be tricky, consider this. You have a customer who agrees to pay you for a service subscription of $1,000 each month for a yearly contract worth $12,000. Should you recognize the $12,000 right away? The answer is no.

Your revenue can only be accounted for once the service has been delivered in totality and when the obligations have been met. In this case, only $1,000 in revenue can be recorded each month until the contract expires.

This is where the problem lies with revenue recognition for SaaS companies and stems from the fact that it’s not always an easy process.

Companies often have to judge complex contracts and decide when and how to record revenue. This leads to companies using different methods for revenue recognition, which creates an inconsistency in their reporting.

Monthly Recurring Revenue (MRR) & Annual Recurring Revenue (ARR)

You’ll often hear two terms when talking about SAAS revenue recognition: Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). These are both essential metrics for understanding your business and its growth.

Monthly recurring revenue is your customers’ subscription revenue each month. It does not include one-time fees or usage-based fees.

Annual recurring revenue is the same as monthly revenue, but it is calculated every year instead of every month.

When you multiply your monthly recurring revenue by 12, you get your annual recurring revenue.

Bookings

Bookings are the total dollar value of a new contract or renewal. They include any money that you have contracted for in the future.

For example, if you sign up a new customer for $500 per month and commit to one year of service, it’s not just $500 this month that you can count on as revenue. You can count on $6,000 for this customer over the next 12 months (more if they renew at the end).

The reason that bookings are so essential is that they help you predict your company’s future revenue. Revenue (also called ARR) is excellent because it gives you an idea of what money is flowing into your business.

However, bookings are like a crystal ball into the future and provide you with insight into what is likely to happen later based on what has happened so far.

Bookings can forecast future revenue and show investors how much money your company has “booked.”

This can be useful when pitching potential investors since it shows them how much money your company has effectively contracted for with its customers over a set period. This also gives them an idea of how much revenue they can expect from your company in the future.

Billings

Billings is the revenue that your company brings in during a particular period. This can be tracked on a monthly, quarterly, or annual basis. Billings can also be defined as the revenue recognized in a given period that has not yet been paid for. 

Many SaaS companies refer to billings as the new revenue they book during a given period. While revenue is the money you’ve earned through selling products or services, billings is the money you’re bringing in through the sales team.

For example, if you sign a customer to a six-month contract worth $1,200, you’ll receive $200 per month. Your revenue is $200 per month for six months for $1,200. However, your billings are $1,200 since that’s the amount of money you bring in from the sales team.

Revenue

Revenue is the total amount of money a company receives from its customers in exchange for the sales of goods or services. Revenue is often referred to as the “top line” because it sits at the top of the income statement. The term contrasts the cost of goods sold (COGS), operating expenses, and other expenses that make up the bottom line on an income statement.

The three main types of revenue are recurring revenue, project revenue, and transactional revenue.

Recurring revenue comes from a consistent source, often from subscription-based products or services; project revenue is based on the delivery of a one-time service, and transactional revenue is typically fee-based for each transaction. 

The difference between revenue and billings is straightforward — it’s just the timing of when you recognize them on your financial statements. Revenue is recognized immediately when earned, while billings are recognized immediately when billed (but before actually being paid).

It’s important to note that revenue recognition doesn’t mean cash received. For example, if you record $100,000 in revenue for a month but haven’t yet received any money from your customer for that work, it’s still recognized as revenue. In this case, you’d have an accounts receivable balance until the customer paid.

It’s also important to know that revenue is not the same as profit. Profit is the amount of leftover money after you deduct all the cost of goods and expenses from your income.

Key Guidelines for SAAS Revenue Recognition

Startups typically have a lot of things to worry about when it comes to revenue recognition.

Fortunately, the Financial Accounting Standards Board (FASB) has provided some key guidelines for SAAS revenue recognition that can help ensure your business appropriately recognizes revenue by Generally Accepted Accounting Principles (GAAP). They are based on these five steps:

Step 1: Identify the contract terms. 

Step 2: Identify the entity’s performance obligations in the contract. 

Step 3: Determine the transaction price. 

Step 4: Allocate the transaction price to the performance obligations in the contract. 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. 

Key Concepts and Metrics in Revenue Recognition

Now that you’ve got a handle on the basics of revenue recognition, let’s look at some key concepts related to revenue recognition.

Deferred Revenue

Deferred revenue is the money a company has charged its customers for products or services but has not yet delivered.

Deferred revenue is also called unearned or advance income because it occurs when a company receives payment for goods and services that have yet to be delivered.

These goods or services will be delivered in the future, at which point the deferred revenue will then become earned revenue. Deferred revenue is considered a liability on a company’s balance sheet until the obligation is fulfilled, which becomes earned revenue.

For example, if you have a subscription-based business model and charge your customers upfront, you will have both earned and unearned revenue on your balance sheet. Any prepaid subscriptions that you have not delivered yet are considered deferred revenue.

Deferred revenue, or deferred income, is a payment from a customer that has been received by the company but not yet earned. Every time you receive money from a customer, and it’s not yet earned, you need to record it as an asset called “deferred revenue” on your balance sheet. Deferred revenue is considered a liability because it’s an obligation to provide services to your customer in the future.

You’re a software company, and you sell 12-month subscription licenses for $120 per year per user. Your customers pay you upfront before they even use your software. Since they paid you in advance before using your software, this revenue is considered unearned until the services have been provided.

When you receive the money from your customers, you’ll recognize this on your balance sheet as deferred revenue since it represents payments for future services that have not yet been performed.

As soon as your customers start using your software, at the end of each month or quarter, depending on how often you bill them, you’ll recognize some of that deferred revenue as earned revenue by recording sales on your income statement and reducing deferred revenue through journal entries. You’ll continue to do this each month or quarter until all deferred revenue is recognized as sales.

Unbilled Revenue

Unbilled revenue is the value of a signed contract or service yet to be performed. It is also known as deferred revenue, and it is listed on the balance sheet. The income from products or services sold on credit has not yet been billed to a customer.

For example, if a company accepts payment for an annual subscription of $10,000, unbilled revenue will be recorded under liability in the balance sheet.

However, if the company provides the service each month throughout the year ($1,000), $1,000 will be moved to income (after adjusting the liability). The remaining amount in unbilled revenue will still be available to increase revenue when the next month’s services are provided.

The most common way for software companies to generate unbilled revenue is when customers prepay for the service. For example, if a customer signs up for a year of service for $1,200, the company gets paid $1,200 upfront. However, the company can’t recognize that total amount of money as revenue on the income statement because it hasn’t earned it yet — it has to recognize it as revenue over time.

What Is Accrual Accounting?

There are two basic types of accounting methods: accrual and cash-based. Cash-based accounting records transactions when the money changes hands, whereas accrual accounting records transactions when the deal is agreed upon.

For example, if a SaaS startup bills a customer in December, but your customer doesn’t pay until January, a cash-based accounting system would record the transaction in January, but an accrual system would have recorded it in December.

Accrual accounting makes more sense for long-term projects or businesses paid in advance (such as subscription services). If a company signs up 1,000 customers to a subscription service and receives all of the payments, they need to be able to track how much money they’re earning overtime to pay their bills and gauge their growth.

How to Recognize the Three Types of SaaS Revenue

Businesses can generally earn three types of SaaS revenue, i.e., license or user fees, support, and projects. Each of these revenues has specific contract types and obligations, so your business needs to recognize them. 

License or User Fees

License or user fees are what you charge your customers for using your software. Companies that use this system charge per user or seat, and license fees are the most straightforward when it comes to accounting, as they receive payment upfront for the use of their software as a service.

Often these companies will provide tiered pricing schemes based on different service levels, with additional fees tacked on if users exceed storage or bandwidth limits. And some set usage caps at all.

These are usually charged monthly (or annually) per user. If you offer different editions (e.g., Professional vs. Enterprise vs. Ultimate), these will be priced differently. 

The main advantage of this revenue model is that it’s scalable. You get paid every month for as long as your customers use your software, and if more users sign up to use your service, your revenue will increase.

Support

In addition to software licenses, many SaaS companies offer customers support services or technical support at a cost. 

One-time fees can be charged for services like onboarding, training, and additional features that aren’t included in your customers’ subscription plan but are necessary for them to use your service effectively.

Projects

Projects are one-off charges for custom programming or other non-subscription work within an existing contract. For example, if you have a customer who wants to add new functionality to your product and agree to build it for them, you’ll probably bill them separately for that work rather than just adding it to their next renewal cycle.

Aligning COGS With Revenue Recognition for SAAS Companies

Proper revenue recognition is a critical component of a company’s financial statements. It enables investors, management, and the board of directors to make informed decisions about the future direction of the business. 

SaaS companies have to synchronize all costs of goods sold with the recognition of revenue to get a clear picture of the company’s earnings and spending.

Key Challenges of SAAS Revenue Recognition

Revenue recognition is a critical part of your startup’s financial health. With the increasing popularity of SAAS (software as a service) and other subscription-based business models, it can be a significant challenge to manage revenue recognition accurately.

The challenges of managing revenue recognition for your startup include:

Correctly calculating the sale value: It’s essential to correctly calculate the sale value to make sure you’re charging the right amount for your software. This includes ensuring you aren’t undercharging for your product or overstating its capabilities.

Timing of revenue recognition: When you sell a new version of your software, there may be delays between when you start selling it and when you recognize that revenue because there may be different stages in your product’s development cycle where it could take longer than expected to get from one location to another.

The Easiest Way to Ensure Your SaaS Revenue Is Recognized Correctly 

As a SaaS company, you’re probably all too familiar with revenue recognition, as it’s one of the trickiest concepts in accounting and a major topic of discussion. The rules for revenue recognition have changed dramatically in recent years, thanks to new guidance from the Financial Accounting Standards Board (FASB).

The easiest way to ensure your SaaS revenue is recognized correctly is to work with an experienced accounting team. It’s best to work with an experienced accounting firm that has experience managing software revenue recognition.