At least the pictures are entertaining... Let's face it, accounting and bookkeeping are extremely tedious, if not downright boring. After doing all that work, there's nothing worse than finding out your numbers don't balance. No one told you budding entrepreneurs you would need a solid understanding of accounting and booking before you got into the business, right?
Unfortunately, you still need to get your business's accounting and bookkeeping sorted. We know your time could be better spent working on growth hacks for your company or developing your buyer personas with greater detail. To that end, we've scoured the Internet and social media to find the most common questions asked about accounting and bookkeeping.
An understanding of the most basic concepts and documents will go a long way to helping you overcome accounting and bookkeeping hurdles, get your operations in better shape and save you a whole lot of time in the long run.
In fact, many of these concepts and documents are simply formalizations of the concerns most people have when they are supplying or purchasing products or services.
1. What are Payment Terms?
Payment terms are payment rules suppliers impose on customers. Payment terms are used to ensure payments are received within a reasonable timeframe. Suppliers often offer discount terms to accelerate cash collections. For example, a 5% discount could be offered if a customer makes payment within ten days. Otherwise, the customer has the normal 30 days to pay at the normal price.
Net terms are used to describe the full amount due for payment. For example, net 20 means the full amount is due in 20 days.
Discover more about Net D's in our brief guide here.
2. What is a Sales Order?
A sales order is a confirmation document issued by a business to customers before providing products or services. A sales order is issued by a business once a potential customer has accepted a quote. New-to-business owners often confuse sales orders, purchase orders and invoices (each explained below).
Simply put, a sales order is issued to a customer who wants to buy something.
Sales orders are commonly abbreviated as SO.
3. What is an Invoice?
An invoice is used by a business when a customer owes money for products or services. Essentially, an invoice is a bill sent by a supplier of a product or service to a customer. The supplier's sale invoice establishes the customer's obligation to pay while creating a short-term account receivable (current) asset in accounting's balance sheet.
An invoice is a record of a sales transaction and used for deferred payments. In the case of immediate payments, sales receipts are used instead. Invoices include:
- Date,
- Customer name and address,
- Supplier name and address,
- Contact names and details,
- Description of products and services,
- Payment Terms.
Check out more on what is an invoice and what are its musts here.
4. What is a Purchase Order?
A Purchase Order is a legal (commercial) document and first offer issued by buyers to suppliers indicating explicit details, types, volumes, delivery times and agreed prices for products and services. A legally binding contract is formed when a supplier accepts a purchase order issued by a buyer.
It is used to control the purchasing of products and services from external suppliers. They can be an essential part of Enterprise Resource Planning System orders.
Purchase Orders are used to manage the purchase of products or services from suppliers for very good reasons. Purchase Orders are commonly abbreviated as PO.
5. Should I use purchase orders?
The simple answer is yes. While it may seem you are creating yourself extra work by creating purchase orders, there are numerous reasons to use them. The use of purchase orders will benefit your business by:
- Explicitly communicating your intentions to a supplier,
- Highlighting products or services ordered but not yet delivered,
- Stating a near-future financial commitment that is not yet paid,
- Empowering your team with information, especially when checking stock levels,
- Preventing over-purchasing especially if you are working with an unreliable supplier,
- Allowing verification of products or services received against what was ordered,
- Controlling back-order items still due from suppliers,
- Allowing easy viewing of purchasing history with suppliers, including which supplier you bought a particular item from in the past,
- Allowing invoice matching and reconciliation,
- Giving you legal standing for the correct supply of products or services inside a specified time frame,
- Providing evidence required for financial assistance from commercial lenders.
6. What is the difference between a Quote and an Estimate?
It's often impossible for a business to give fixed prices for products and services due to varying skills, time and materials required to meet individual customer requirements when supplying those products or services. When it's not possible to offer a standard price to your customers, you should give a Quotation or an Estimate instead.
A quote is a fixed price offer for the supply of products or services that normally cannot be changed once accepted by a customer even if your costs increase while supplying those products or services. This is why it is often better to give an Estimate unless you are completely sure you will maintain your minimum profit margin.
An estimate is an experience-based and calculated guess at what your customer will have to pay for the supply of products or services – not binding. It's always best to provide several estimates based on varying circumstances, including a worst-case scenario, to communicate the possibility of unforeseen developments and prevent your customer from being shocked by the higher-than-estimate final price. Estimates should always be issued as accurately as possible to build confidence in your customers.
7. Should I collect Sales Tax?
State and local governments (delegated by state governments) impose a Sales Tax at the retail point of sale for products or services. As an SMB business owner, you are required to assess Sales Tax requirements per sale and pay that amount to the appropriate authorities within the required timeframe.
Even though a national sales tax doesn’t exist in the United States (greatly simplified in many other countries), it is important to note the federal government does place levies on selective products and services. If you are supplying products and services to customers across the nation, varying sales tax rates and obligations per state can and will lead to confusion. Adding to the turmoil, some states will require you obtain a sales tax permit to collect sales tax.
Generally speaking, if your business has a physical presence in a state, you will need to pay sales tax to that state. If your business does not have a physical presence in a particular state where you provide goods or services, then you do not need to pay sales tax in that state but you may need to pay sales tax in the state you supplied your products or services from. The definition of a having presence, otherwise known as a nexus, also varies from state to state.
Sufficient Physical Presence, known as Nexus, is a legal term explaining the requirements a business has to collect and pay their taxes in a given state. Before the days of online shopping, this was a relatively simple process. However now, states are in need of finding new routes to collect taxes from businesses selling their products and services virtually, and therefore practically borderless.
The US Supreme Court held in 1967 and 1992 that states should not collect taxes from sales if the retailer does not have a physical presence in the state. These two cases should have been an end to the practice but states keep changing tactics.
And the difficulty with Sales Taxes doesn't end there. States impose sales tax either on the retail seller or on the retail buyer to be collected by the seller. As a seller, you are required to collect it unless your customer provides a sales tax exemption certificate. The rules and procedures for sales tax and exemptions vary from state to state and are available from each state or local government – complicated enough?
You will still have to pay sales tax per sale whether you collect it or not. So yes, you do need to collect Sales Tax where and when it is required. Heavy penalties apply for overdue sales tax payments – there's certainly nothing like having great software to manage all sales tax issues for you.
8. How should I gauge when to collect a deposit and when not to?
Getting stiffed on payments is a very big issue for most SME business owners, freelancers and other smaller contractors, especially when you are just getting started. Even if your customers do end up paying late, you are still stuck with cash flow problems while you wait. Debt Collection is your final option but even that leads to loss of income.
Creating payment policies for your business will make it easier to implement those payment policies and also make it easier for your customers to accept them. Customers are more likely to accept payment requirements when they hear that those requirements are simply a matter of policy rather than something applied specifically to them – it's a matter of psychology!
It's also easier to collect deposits when they are inside Standard Payment Policies, such as partial payments during the process of supply. If a customer resists a request to pay a deposit, you know they are not as committed as they may appear. You will have to decide your own rules for collecting deposits. Here are some good guidelines you might want to follow:
- Collect deposits on first-time customers – regular customers with a good payment history can be trusted and you probably don't need to ask for a deposit but there is nothing wrong with getting a deposit on each order.
- Collect deposits for the supply of products or services that will take time to deliver.
- Collect deposits for the supply of products or services that require a direct cash outlay to deliver – which is most of the time because even if you are a sole trader you need money to live!
- It's more reasonable to ask 30% deposit with a partial payment of 30% and a final payment of 40% than asking for 50% deposit and a final payment of 50% – and you benefit from the regular inflow of cash.
There's absolutely nothing wrong with asking for a deposit and a good customer will have no problem making the payment. Unless your customers are making an immediate payment for products or services, it's always good to require a deposit – it's that simple!
9. How can I effectively use billing statements with my customers?
The Billing Statement Lists the charges your customer has accumulated over a Specific Period of Time (Billing Cycle). Because you are regularly sending a document you know your customers will pay attention to, billing statements can be used for more than just keeping your customers informed about their account – it's time to get creative! Or to at least not make a fool of yourself. In the latter scenario feel free to check this handy short-guide on Free Billing Statement and download some of their templates as well.
In the other case, make sure your own template takes into account the following elements/principles:
- High system security and user access management.
- User management and audit trail.
- Sales reports.
- Order and invoice processing. Stock reports.
- Stock reports.
- Stock control and management. The latest point of sale application – with the flexibility and ease of use that comes with it, including a user-friendly mobile version.
- The latest point of sale application – with the flexibility and ease of use that comes with it, including a user-friendly mobile version.
10. What is a Credit Memo?
A Quick Sale is essentially a sales receipt used at a point of the sale transaction. Quick sale receipts are often much smaller than invoices and you will have received many of them in your life. Quick sales for POS are designed for convenience.
That being said, actual physical Quick Sale Receipts are fast being replaced by electronic versions, especially due to the growth in smartphone and tablet-based transactions in-store – also as a result of increased transactions online. A quick sale receipt contains information about the products and services purchased, the price, total price, taxes, date and supplier information.
The purchaser's name is rarely included. It is important to note when you receive what looks like a quick sales receipt in a restaurant to pay your bill, you are receiving a Quick Sale invoice showing you the total amount owed. After you pay your bill, you receive a quick sale receipt.
Liked this read about the top 10 most boring (yet necessary) accounting questions? Then you will like our Cloud-based Accounting Solution as well - ZarMoney.
