Startup Accounting - The Wrong Sales Amounts And How To Avoid Them 2020
Startup founders, are you reporting the right sales amount for 2019 in your tax return? Don’t take the sales numbers as they are without double or even triple checking them from your accounting books. So let us go over a few questions to help you better understand sales and why it is important to report the right amount.
First, what is the definition of sales?
Sales is what a company earns through its business activities. Examples of business activities are things like selling goods as well as selling services. Under accrual accounting, sales are recognized when the goods or services have been delivered to the customer. In other words, if your customers have not received the products or services, you do not consider these as sales. These are instead considered as unearned revenue, even if you have created invoices or received payments for your customers, they simply do not count as sales.
Second, why is it important to report the right sales amount in the first place?
The amount of tax you owe is calculated based on the total sales amount you earned in 2019. The more sales you are reporting, the higher tax amount you will need to pay. It is this reason that you need to be absolutely sure that you are reporting the correct amount of sales for 2019. The last thing you need is incorrect information on your taxes.
Third and most importantly, how could you record the wrong sales amount?
Let us put our CFO hat on really quick, and go through the four scenarios below, to make sure that you are reporting the correct amount of sales for 2019 for your startup.
You could have recorded the wrong sales amount if you have done any of the things below:
1. You accidentally added the investor’s investment as sales.
Is that even possible? Yes, make sure you review your bank deposits and not accidentally add investors’ investments as sales revenue. This happens more often than you think, but luckily it is an easy fix. So as long as you review your sales transactions, you will be fine.
2. You created invoices for 2020 with the dates in 2019.
For the invoices created with 2019 dates, the sales would be recorded as 2019’s sales. If you haven’t delivered the goods or performed the services, you will want to record these sales as unearned revenue which will move the sales amount from an Income statement to a Balance sheet.
3. You did not write off the sales as bad debt when they are uncollectable.
For any invoices in 2019 that you know for sure can no longer be collected, you want to write them off as bad debt as soon as possible. If you don’t write the uncollectable invoices off as bad debt, you will be paying taxes on them. I have a blog that talks extensively about how to deal with bad debts. If you have any additional questions about bad debt, make sure to click the link.
4. You have added both invoice and payments under sales for the same services performed or products delivered.
Let’s use QuickBooks Online as an example. In QuickBooks Online, you will need to match the payments to invoices in the banking section. You can NOT add the payments as sales, and/or mark the invoices as paid. The reason is that by doing this, it will duplicate your revenue (which is not good). Even worse, you therefore will pay extra tax due to duplicated sales amount. So, make sure to review your payments and invoices and be sure that everything is accurate. We don’t want you to pay more taxes than you need to.
Key takeaways:
Most important thing to remember here, make sure to verify each transaction under sales on your Income Statement, and make sure that all the sales transactions have invoices and payments to match with for 2019. For the ones that you have questions with, make sure to talk to your CPA to gain a better understanding.
Conclusion:
So, in short, review all the sales transactions carefully to avoid paying any unapplied tax for your company. Now you know the four causes of why the sales transactions could be wrong, let’s put your new skill to work and create a perfectly accurate sales record for 2019!
