Tracking the Health of Your Business Through a General Ledger

The General Ledger—How it Works
A general ledger account is an account or record that’s used to sort, store, and summarize your company’s transactions. It’s the lifeblood of your business and provides a report of how healthy it is.

General ledger categories include asset accounts, namely cash, accounts receivable (legally enforceable claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but have not paid for, generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed timeframe); inventory investments (a component of the gross domestic product [GDP]. What’s produced in a certain country is eventually sold, but some of the goods produced in a given year may be sold in a subsequent year, rather than in the year they were produced); land, and equipment.

The general ledger is a master accounting document that provides a complete record of all the financial transactions of your business. It serves as a central repository for accounting data transferred from all subledgers.

Accounts arranged in a general ledger can be a grouping of as many as hundreds of accounts that are used to sort and store information from a company’s business transactions. They can be organized into balance sheet accounts, such as assets, liabilities, equity, and income statement accounts, which include revenue, expenses, gains, and losses; and the chart of accounts, a listing of general ledger accounts to which amounts can be posted. It’s a helpful tool for identifying the best account for recording a transaction. It includes balance sheet accounts, which report an organization’s financial position at the end of an accounting period; followed by income statement accounts, which report a summary of a company’s revenue, expenses, gains, losses, and resulting net income during a specific timeframe, such as year, quarter, or other specified time period.

In a nutshell, a general ledger helps you look at the bigger picture in terms of the financial health of your business. Accounts include assets (fixed and current), liabilities, revenue, expenses, gains, and losses.

Traditionally, in the past, accountants manually recorded financial transactions in a ledger, using the double-entry accounting method. However, with computers today, recording transactions has become easier. There’s no need to record and store the data in books by hand; business owners now use Excel® spreadsheets and other sophisticated accounting software.

Despite the advent of computers to track your business’s financial health, transactions still need to be recorded in a ledger. Accounting software can create financial reports, which are crucial for evaluating the health of your business.
Now that we’ve provided an overview of accounting, here’s a more detailed breakdown of how it works.

 

Double-entry Accounting
There are two primary types of accounting methods. Single-entry bookkeeping, where income and expense transactions are recorded in a cash register, compared to the double-entry system, which starts with a journal, followed by a ledger, a trial balance, and finally financial statements.

If you’re a solopreneur, the single-account method should work for you. However, the double-entry accounting method makes it easier to prepare financial statements and improve accountability. So, switching to the double-entry accounting method may be worth considering.

Regardless of which method you use for your business, general ledgers use the double entry accounting method, which means that an entry to one account requires an opposite entry to another account. Rephrased: every debit made on one account has a credit on another. Picture it as a positive canceling itself out in the negative column.
A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company’s balance sheet. A “credit” is the inverse—it’s an entry made on the right side of an account. It either increases equity, liability, or revenue accounts or decreases an asset or expense account.

Because credits and debits lead to the formation of an account that resembles the letter “T,” ledger accounts are also known as T-accounts; they’re called T-accounts, because the bookkeeping entries are laid out in such a way that resembles a T-shape and the account title appears just above the T. It’s an informal term for a set of financial records that use double-entry bookkeeping.

Journals

The term “journal” keeps a record of transactions; it isn’t a document that you log your personal life in. These transactions are first recorded before they’re transferred to ledgers. Ledgers look at the big picture in terms of the financial health of a business and serve as a master document, while a journal breaks down/analyzes the finer details of your business. And, comparable to a ledger, transactions are usually recorded on a daily basis and show a credit and a debit for each entry.

There are seven types of journals, the most common being sales, purchase, cash receipts, and cash payment. Below is a quick recap of each.

  • Sales Journal records credit sales. For example, customers (debtors) who buy goods on credit or account. It records the credit sale of merchandise only.
  • Purchase Journal records the credit purchase of merchandise, such as supplies and equipment. Since a purchase journal keeps track of merchandise purchased on credit, purchasing assets and other things on credit should not be recorded in a purchase journal; rather these entries should appear in a general journal.
  • Cash Receipts Journal records all cash inflow, such as cash for services rendered.
  • Cash Payments Journal records all cash outflows, also known as cash receipts, and is generally used in medium- and large-size businesses.

The Basic Accounting Equation

The purpose of double entry accounting is to make sure a basic accounting equation balances, meaning the relationship between assets, liabilities, and the owner’s equity of a business. It’s the foundation for the double-entry bookkeeping system. For each transaction, the total debits must equal the total credits.

If, at any time, the sum of debits for all accounts does not equal the sum of credits, the equation will not balance. Think of it like balancing your checkbook monthly.

Why Have a General Ledger?

You and your financial advisor need to decide what’s right for your small business when it comes to preparing a general ledger. While it’s not essential for a small business, here are compelling reasons why you should consider setting up a general ledger.

  • You’ll have an accurate record of all financial transactions.
  • It’ll help you compile a trial balance, so your books balance.
  • It makes filing tax returns easy, because you’ll have expenses and income in one place. No need to dump out a shoebox and sort through little pieces of paper.
  • It reports real revenue and expenses, which will help you stay on top of your spending.
  • You’ll be able to spot unusual transactions immediately and address them.
  • It helps you identify (and stop) fraud—something that’s important to all of us.
  • It’ll help you compile key financial statements, such as cash flow statements, income statements, and balance sheets, all which are crucial when evaluating your profitability, liquidity, and the overall financial health of your business.

Recap

To sum it up, a general ledger tracks all the financial transactions related to your business. If you’re new to managing a general ledger, you may find it a daunting process; however, it’s a valuable tool that provides a picture of where you stand with the finances of your business. Remember, you can’t run a successful business without knowing where you stand with it financially.

To help break things down, you need to understand the fundamental principles of double-entry accounting, the basic accounting equation, and how to transfer journal entries to the ledger.

Once you understand and start using the general ledger, you’ll realize how powerful a tool it is. It offers several compelling benefits for your business. Arguably, the most important is that it’s the foundation for creating financial statements that are critical for evaluating your financial affairs.

Now That You Have a General Ledger…the Next Step is Merging Your Payroll with Your Accounting Software

When you switch to accounting software, such as QuickBooks®, which automates your company’s financial functions and transactions with modules that include accounts payable, accounts receivable, payroll, billing, and the general ledger, you’ll find yourself entering fewer numbers, tracking fewer receipts, and spending less time keeping everything in line. Plus, when you use a payroll service, such as ASAP Payroll Service, you can either use the online version of QuickBooks® or the desktop version. The combination of QuickBooks® and a payroll service will enable you to focus on managing your business day-to-day. This will save you time by making sure your cash deposits are handled correctly.

When you choose a payroll service (such as ASAP Payroll Service) and an accounting package (such as QuickBooks), both will be able to “communicate” with each other. This frees you from making manual entries. And, integrating a payroll service with your accounting software is generally a straightforward process for businesses of all sizes.

Step One: Get everyone on the same page

Before moving your information between systems (accounting and payroll), you’ll need to let your payroll provider and your accounting software vendor know that you want to share your information. So, make sure you double-check access from each side of the equation before you start sharing information.

Step Two: Map things out

Next, depending on your system, this is where your payroll software, such as ASAP Payroll Service’s Evolution software, a SaaS-based payroll and tax management system, can provide features, flexibility, and best practices to handle nearly every type of payroll, regardless of complexity or uniqueness.

Whether it’s handling simple payroll for a small company or complex payroll for a large company with multiple locations, Evolution can handle nearly every type of payroll. It supports payroll entries from employers from anywhere in the world with internet access via Evolution’s proprietary SaaS-based system. It’s also easy to accommodate payroll and reconciliation for any company structure with Evolution’s Client, Company, and Organization Level setup.

Beyond paying employees, keeping up with ever-changing federal, state, and local payroll taxes can be a complex and time-consuming task, but with Evolution’s integrated Tax Management engine, you’ll have the peace of mind that your business will remain compliant. Simply look for the button inside the payroll system on the ASAP Payroll Service website. It’ll take you to QuickBooks®.

Then, at some point, you’ll need to communicate to your accounting system how to handle the information that comes in from your payroll service. Sometimes this will appear on the accounting software side, at other times, you’ll tell the payroll service how to export the data.

Step Three: Completing the process

This isn’t a difficult system to setup or explain. You simply copy large quantities of your data from one location and paste it into another.

Final Thoughts

Nearly every system available today is a straightforward process. If you choose another option, it can be very time-consuming—where you’ll find yourself downloading a file and then uploading it into your accounting system.
Remember, your accounting software is a good place to start with integration.

Demystifying Employee vs. Independent Contractor

An employee and independent contractor (self-employed) may do comparable work for your company; however, there are distinct differences between the two. Whether you employ one or both classifications, you need to clearly understand the legal distinctions between them.

An employee works exclusively for a single company and will be compensated on a salaried or hourly basis. Employees are subordinate to employer authority to a greater extent than independent contractors. This means that employees will have to adhere to company policies and requirements as a contractual obligation of their employment.

When you hire an individual whom you classify an employee, your company must withhold their income tax, Social Security, and Medicare from the wages you pay them. Plus, as an employee, they’re protected under employment and labor laws.

Employees are bound by the value statement of their employer and they receive supervision, work hours, and requirements from their employer. If the work that’s accomplished and how it’s directed to be done is identified, and certain other relevant aspects of a worker’s job are directed and controlled, then the company exercises financial control.

Such control encompasses:

  • The extent of the worker’s investment in the facilities or tools used in performing services.
  • The extent to which the worker makes his or her services available to the relevant market.
  • How the business pays the worker.
  • The extent to which the worker can realize a profit or incur loss.

If the services provided are a key activity of the business, this dictates the extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Distinguishing Between Employee and Contractor

How you, the employer, and the worker perceive the relationship is also important for determining worker status. Key topics, according to the IRS, include:

  • Written contracts describing the relationship the parties intend to create.
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation, or sick pay.
  • The permanency of the relationship.
  • The extent to which services performed by the worker are a key aspect of the regular business of the company,
  • The extent to which the worker has unreimbursed business expenses.

Contrast this to a business owner or contractor who provides services to your and other businesses. In this case, they’re generally considered self-employed/independent contractors and must handle all of the above on their own and more.

Think of your company’s relationship with an independent contractor as business-to-business. Independent contractors bring specialized expertise to a project or task. As their client, you’re not responsible for providing them with training and they can be a great way to fill your business needs.

Most independent contractors are highly skilled. They generally demonstrate a distinct level of specialization in their industry, claiming they get work assignments because they offer far reaching skills that often require certification, special training, or education.

Independent contractors work with multiple clients on a per-project basis OR with one company for a specified period of time. They are paid an hourly wage or per project and are responsible for securing (on their own) almost every benefit allocated to full-time employees.

They’re responsible for performing the services summarized in a contract, known as a Scope of Work (SOW), which outlines and executes a project through specific tasks, activities, deliverables, and timelines.

While independent contractors have freedoms, such as not being confined to working an eight-hour day, prior to COVID-19, nearly one in 10 Americans was classified as an independent contractor. They are responsible for the work and hours they keep. However, there are tradeoffs. The work might not be as steady, independent contractors provide their services to more than one company, they can subcontract with others, and they need to be sufficiently disciplined to keep scrupulous records of their earnings, because no taxes are withheld and employment and labor laws don’t apply.

While there are pros and cons to employees vs. independent contractors, below is a checklist to help you, the employer, decide which status works best for your company:

  • Does your company control or have the right to control what the worker does and how the job is performed? This means complete control over work method, work product, and training.
    According to the IRS, under common-law rules, anyone who performs services for you is your employee, provided you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
  • Are the business aspects of the worker’s job controlled by the payer, such as does your company control the business aspects of the worker’s job, including how the worker is paid, whether expenses are reimbursed, and who provides their tools and supplies?
  • Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor. Also, factors that are relevant in one situation may not be relevant in another.
  • Look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, document each of the factors used to come up with the determination.
  • Is there a written contract in place or employee benefits, such as a pension plan, insurance, or vacation pay? Although a contract may state that the worker is an employee or an independent contractor, this isn’t sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor responsible for paying his or her own self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
  • Is the relationship ongoing and is the work a key aspect of the business? If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or time period, this is generally considered evidence that the intent was to create an employer-employee relationship. The permanency of the relationship plays a key role.
  • Are the services provided a key element of the company? This determines the extent to which the individual is viewed as an employee or independent contractor contributing to the regular business of the company.

The Internal Revenue Service uses a right-to-control test to assess a business’ tax liability. If you’ve determined that the person you’re paying is an independent contractor, then you must have the contractor complete a Form W-9, Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number (TIN) of the worker. The W-9 should be kept in your files for four years for future reference in case of any inquiries from the worker or the IRS.

Each state also has tests to determine a person’s status under workers’ compensation and unemployment insurance laws. The economic realities test used in most states makes it difficult to classify a worker as an independent contractor, because, in addition to the degree of control test, it considers the degree the worker is economically dependent upon the business. For a list of state labor offices’ contact information, go to the U.S. Department of Labor’s state workforce agenciesvisit disclaimer page.

To further help employers distinguish between employees and independent contractors, the chart below depicts differences:

Employment Laws Covered by specific federal and state employment and labor laws Not applicable/covered by employment and labor laws
Hiring Practice Potential employee completes an application that’s handled by Human Resources. Once applicant receives and accepts a job offer, employer asks for additional information about the employee, such as date of birth, marital status, and citizenship status. Potential contractor normally interacts with an individual or department that seeks certain services or tasks completed. Potential contractors might be asked to submit a proposal. Contractor enters into a contract, which includes a Statement of Work, with the legal or procurement section of the business.
Tax Documents Employee must provide employer with name, address, Social Security number, tax filing status, and number of exemptions on a W-4 Contractor provides name, address, Taxpayer Identification Number, and certification about back up withholdingvisit disclaimer page on a W-9
Payer’s Tax Reporting Requirements Employer reports all money paid to employee during the tax year on a W-2 Must report payments of $600 or more in a calendar year on a Form 1099
Reporting to Other Agencies Employer files reports for state and federal unemployment insurance. None
Value of Work or Contract New employee is paid either hourly or a salary. A contract covers payment for the for total amount. Can cover an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid in full when the job is completed.
When Paid Employee must be paid consistently based on a pay schedule, as identified by employer, unless schedule is formally changed. Pay periods can vary from one week to one month; however, federal and state laws require an employee be paid on the normal pay date or earlier if the paycheck is not negotiable on the normal pay date, which can occur on holidays. Upon receipt of an invoice/statement of services, Accounts Payable pays the contractor. The terms of the contract or Statement of Work dictate when payments are made, such as upon completion of a task or in periodic amounts. Most businesses do not pay contractors via payroll staff.

The IRS mandates knowing the rules related to when to classify an individual as an employee vs. an independent contractor. It can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, also serves as an excellent resource.

Mistaking an Employee for an Independent Contractor

If an employee is classified an independent contractor with no sound basis for doing so, the employer is liable for employment taxes. Some employers who can provide a reasonable basis for not treating a worker as an employee may avoid paying employment taxes. For more information, go to irs.gov/Publication 1976, Section 530, Employment Tax Relief Requirements.

Another option is to check the Voluntary Classification Settlement Program (VCSP) at irs.gov; it offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

Small Business and ACA Compliance

Words Affordable Care Act ACA written on a paper.

Defining Small Business

We’re all familiar with the term “small business.” Under this umbrella, the Small Business Administration (SBA) states there are 27 million small businesses in the U.S.; but, depending on who’s using the term, it has different meanings. As mentioned, the SBA defines “small business” as any actively operating company with 500 or less employees. Contrast this to how the Internal Revenue Service (IRS) defines the term in conjunction with the Affordable Care Act (ACA)— fewer than 50 full-time and full-time equivalent employees—though there are exceptions to this rule. Confused?

This confusion is compounded by employer layoffs in 2020 due to COVID-19. How do you, as an employer, determine whether it’s appropriate to lay-off your employees, keep up-to-date with state and local ordinances that change weekly, and figure out how to fund your next payroll cycle.

Then, there’s the question of how to juggle compliance with the ACA and learn the ramifications if you don’t. Once the economy becomes more stabilized and you think you’re out of the woods, you could be notified by the IRS that you’re subject to penalties for not remaining ACA-compliant during the pandemic. And, ACA penalties aren’t small.

Does Your Business Qualify as a Small Business?
For starters, there are two sets of rules that classify as a small business, as identified by the ACA and as outlined in the ACA section of the IRS website:

“…generally those with fewer than 50 full-time employees, including full-time equivalent employees.
If you have fewer than 50 employees but are a member of a group with a certain level of common or related ownership with 50 or more full-time employees, including full-time equivalent employees, then you’re subject to the rules for large employers.”

According to the ACA:

  • As a self-employed sole small business proprietor with no employees, you’re exempt from penalties, referred to as Employer Shared Responsibility Payment (ESRP), which falls under the ACA.
  • If you have approximately 50 employees, both part-time and full-time, and they meet this threshold, then the ACA applies to you. Note that “full-time equivalent” generally means your employees work 30 or more hours weekly. Plus, the hours your part-time employees work must be configured to determine the number of Full-Time Equivalent employees.
  • If you have a member-owned business, one that the members govern, and it has fewer than 50 employees, you’re exempt. However, if those employees are part of a larger group under common ownership, which, together employ 50 or more full-time equivalent employees, then your business is considered a large business and the ACA rules apply.
  • To report information regarding your employees’ health care coverage to the IRS, use forms 1094-C and 1095-C, irrespective of whether you offer coverage to your full-time employees or not.
  • Give your full-time employees a copy of Form 1095-C, the same information you’re reporting to the IRS.

Options and Responsibilities

If you fall under the classification of a small business, according to the ACA, here are your options and responsibilities:

  • You can purchase health and dental insurance through the Small Business Health Options Program (SHOP). It offers plans through an insurance company or with the assistance of a SHOP-registered agent or broker. The site provides a graphic that helps you work through the pros and cons of a SHOP plan and an HRA to determine which is right for your small business and your employees. Check out HealthCare.gov for more information.
  • In 2013, the IRS issued final regulations implementing the Additional Medicare Tax as added by the ACA. The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding this tax in certain circumstances. The amount you will need to withhold is an additional 0.9 percent of employee wages or compensation when it exceeds $200,000 in a tax year.
  • Once your company offers health insurance, you are obliged to offer it to all eligible employees within 90 days of the start date of their employment.

Avoid Penalties

As an employer, you can face penalties if:

  • under 4980H(a), you fail to offer minimum essential coverage (MEC) to at least 95% of your full-time employees (and their dependents), and at least one of your full-time employees was certified, as allowed by the Premium Tax Credit (PTC).
  • under 4980H(b), you offer MEC to at least 95% of your full-time employees (and their dependents), but at least one of your full-time employees was certified as being allowed the PTC (because the coverage was unaffordable or did not provide minimum value, or the full-time employee was not offered coverage).
  • You need to be particularly diligent when completing the 1095C-form related to ACA Compliance, especially lines 14, 15, and 16. Lines 14 and 16 require you, as the employer, to select the most accurate “Indicator Code” that expresses the offer of coverage and subsequent safe harbor relief that was or was not made to the employee. This form needs to be submitted both to your employee and the IRS, because it ultimately determines noncompliance by the IRS and is used to calculate penalties that you, as an employer, may owe.

To further confuse matters, until recently, there were 10 choices that you needed to pick from among the Indicator Codes to complete Line 14. Recently, eight additional Indicator Codes have been added to Line 14, which further complicates things and makes it easier to make an error, which you would be held responsible for.

These eight new Indicator Codes were prompted as a result of the Trump administration’s expansion of Health Reimbursement Arrangements (HRAs). In 2019, the administration finalized new rules that let HRA’s that met certain conditions be considered for minimum essential and affordable coverage related to ACA compliance. Check for more information and guidance from the IRS on Indicator Codes and all aspects of the draft forms. Note that these new updates can compound the confusion related to what already exists for employers.

There are other practical issues related to COVID-19 that are expected to create problems for employers, as they try to keep compliant. An example is employers who furlough employees or reduce their hours may need to properly identify the change in status in the tracking process, and subsequently, in what is reported to the IRS. While some of these nuances existed before, they will be magnified as things keep evolving and changing, possibly increasing the chance of employers making errors. It’s important that you, as the employer, are prepared to handle this in order to remain compliant.

Remaining ACA Compliant

Keeping abreast of ACA-compliance issues can be a full-time job. For example:

  • Performing all legally required IRS and employee reporting.
  • Documenting that you offer your employees health insurance.
  • Accurately tracking payroll deductions.
  • Checking for employee eligibility.
  • Determining your employees’ affordability.

It’s critical that you know how to navigate through these stormy waters. Check out the compliance tool at business.USA.gov/healthcare for more information. Remember, non-compliance can result in penalties.

If you need help maneuvering through all this reporting, ASAP Payroll Service can help. We can assist with:

  • handling all legally required IRS and employee reporting.
  • tracking all employer-provided health care offers.
  • documenting employee health care options, including waiving offers.
  • bridging health care options to employee payroll deductions, resulting in easy maintenance.
  • handling scheduled status updates to monitor health care eligibility for new and variable-hour employees.
  • utilizing payroll data to track employee eligibility for health care offers going to ongoing employees.
  • gathering employee wage information and using it to determine affordability of health care offers for each full-time employee.
  • handling additional HR reporting, such as OSHA, EEO, and Veteran reporting, provided education/required education tracking, performance evaluation tracking, property tracking, document storage, and more.

The Importance of Tracking and Reporting
While these 2020 form changes were expected, they were still a surprise in terms of the extent they have been proposed in draft forms by the IRS. Plus, the pandemic has created problems for employers who are working on being compliant. For example, if you have furloughed employees or reduced their hours, you may need to properly identify their change in status in the tracking process, and subsequently, in what you report to the IRS. As an employer, if you lay-off employees and rehire them again when the economy picks back up, know that this, too, can have an impact on an employee’s status related to employee tracking. There are very specific rules related to rehiring and how you treat those employees, based on a timeframe. This references breaks in service and the 13-week rehire rule. While this rule has been in place prior to COVID-19, now it will be magnified during this ongoing pandemic, thus opening up the possibility of increased errors in reporting. Juggling all these requirements is challenging to say the least, but necessary to remain compliant.

Recap

As we head into the last quarter of 2020, to date, it’s been a year replete with employer challenges and is expected to continue through December. As an employer, you need to be smart and diligent about keeping apprised of any and all changes that occur, including changes to state and local ordinances; legislative opportunities, such as new SBA loans; and compliance changes, such as 2020 draft 1095-C forms. As an employer, rely on your service provider to help you navigate through these changes and remain compliant. Your service provider (hopefully, ASAP Payroll Service) can play a major role in keeping you on track and helping you avoid major penalties.