Episode 9: Bookkeeping Terms EVERY Studio Owner Should Know

Welcome to episode 9 where we discuss more bookkeeping terms that studio owners should know to better run their business.

Let’s begin with depreciation – An asset schedule assigns each asset with a value that decreases over a certain amount of time. A car might be 5 years, a computer 2, and real estate 50. They will take the cost of the item and divide it over that length of time. You will get a tax write-off, or deduction each year for it.

The next term is amortization expense. This is an expense for intangible assets. That includes things such as the purchase of a franchise or leasehold improvements. It is the same process as a tangible asset, so you will not be writing these off all at once. The difference is simply that it applies to things that you either can’t touch, or can’t take back, like the paint on your walls.

Moving on to the third term, this one is general ledger. This refers to the report that records every single transaction or every entry made. You can pull this report right from QuickBooks.

The next term is inventory – which seems straight forward enough, right? Inventory is items you buy in order to resell. But be aware, and this is where business owners can sometimes get tripped up, inventory is different from inventory assets. I’m saying this because inventory assets are a category you see on your balance sheet and you may be tempted to put your inventory purchase expenses here. Don’t do that. Doing that will show a much higher net income because you’ll be missing all of the expense that went into making that money.

Inventory Asset is an asset account that represents the items that you purchased and have not yet sold. This is inventory that you still have on hand, hence the term asset. As you buy things, we recommend that you post it to an account called Purchases for resale. A lot of studio owners don’t feel like they sell enough products throughout the year to separate this account into more detailed ones, so we will typically do a yearly inventory adjustment. This is when you do a physical count of all items you still have on hand at the end of the year.

Our next term is journal entries. These are a way to add data into quickbooks without touching a bank account. 90+% of what comes through quickbooks will hit a bank account or cc, but maybe you purchased something for the business using your personal account that is not linked to your quickbooks. A journal entry is the way you would input that data.

Another example of using a journal entry - let's say you had to pay rent or a loan from personal funds one month. It was still a business expense and although it won’t show coming out of a business account, we want to make sure it still shows you paid it. We would then create the JE to hit the owners or members contribution equity account. We have even created spreadsheets for clients that pay for business expenses from personal funds frequently, because we want to show ALL business expenses, even if they were not paid out with a business account.

Reconciliation, which simply put, is balancing your checkbook and making sure every transaction in and out is accounted for.

What is the best way to reconcile your books? The best way to do it is by going off of a bank statement. Each month the bank will send you a statement that has the beginning balance, all the deposits and expenses and then the ending balance. What you want to do is make sure the beginning balance matches, then you enter all the transactions and reconcile your books to the statement date (we typically do monthly, if a statement ends on the 24th we will go online and enter any remaining transactions for that month and reconcile to the ending balance there.)

Important to note: you want to make sure everything clears. This means that all transactions that were supposed to clear the bank did. An example of this can be if you’ve written any manual checks. Was the amount written correctly, did the check get processed? If there are items that aren’t reconciled, you need to figure out why.

The next term is interest. This represents what you pay out for the privilege of using someone else’s money. Loans. Credit cards. With some loans, they front load the interest. That means that all of the interest which would normally be spread out over the length of the loan, are added to the amount owed upfront. So if you had a $30,000 loan, with $6,000 of interest, you essentially owe $36,000 right out of the gate. That’s a number that you would want to enter in a general journal entry, so that the interest is represented in your books.

Another term that most people are familiar with is payroll. Payroll is when you compensate an employee, not a subcontractor. In the payroll category you would have entries for salaries and wages, employer payroll taxes, and payroll processing fees. You would not have subcontractors pay in this category. That’s an important distinction because some people assume that payroll refers to the money that you pay for someone that does work for you on a regular basis. But that is not the case. This term applies to employees only.

The next two terms are accounts receivable and accounts payable. A receivable account is when someone owes you money, such as a vendor, or a customer that owes tuition. Accounts payable, represents those folks or entities that you owe money to.

Our final term is the fiscal accounting period. This is likely a calendar year for you, January 1st – December 31st. This is the time period that you will use to capture your financial snapshot and also use to file your taxes.

The more practice you have with using and knowing these terms, the more astute you are at recognizing when something isn’t right, which if you catch it, will help you make corrections now, and save you time and stress later.

Thanks for joining us!