Accounting for Small Businesses Tip
Characteristics of Corporations

Financial Management for Small Businesses Tip
Setting Financial Objectives

Bookkeeping Services Tip
Making Accounting Adjustments - Recognizing Revenues and Costs

Payroll Services Tip
Worker Classification

QuickBooks Tip
QuickBooks Setup Procedures - Defining Preferences

Characteristics of Corporations
Corporations are a common form of business organization found in the United States today. They are separate legal entities created for business purposes that essentially function as any individual; that is, they may, among other things, own assets, hire employees, file lawsuits, incur liabilities, pay taxes, and enter into contracts. They may be classified as either C corporations or S corporations for tax reporting.

This article provides an overview of the corporate form of entity. The issues discussed generally apply to all corporations regardless of whether they are classified as C or S corporations for tax reporting.

Corporations are created under state law. Thus, the rules for organizing and operating a business as a corporation vary with each state. The basic provisions of corporate laws are similar in most states, however. Although corporations are formed under the laws of a particular state (where they are referred to as domestic corporations), they may file applications to conduct business in other states (where they are referred to as foreign corporations).

Advantages of Incorporation
Operating as a corporation has several advantages in comparison to operating the business as a partnership or proprietorship. The following paragraphs discuss some of those advantages.

Limited Liability. Because a corporation is a legally separate entity, creditors cannot appropriate the stockholders personal assets to satisfy corporate obligations. Thus, the stockholders risk of loss generally is limited to the amount invested in the stock of the corporation plus any loans made by the stockholders to the corporation.

Merely forming a corporation will not guarantee that the stockholders liability will be limited, however. The corporation must have a legitimate purpose and comply with corporate formalities and procedures such as the requirements to:

1. have a board of directors,
2. have corporate officers,
3. hold stockholder and director meetings and document the meetings by preparing minutes,
4. have corporate bank accounts, and
5. file tax returns.

Otherwise, the business may be determined to have been operating as a noncorporate entity, and stockholders may be held personally liable for corporate obligations and taxed personally on the income generated by the business. In addition, lenders often require stockholders of small to medium-sized closely held corporations to guarantee loans made to the corporation. In those instances, operating as a corporation would not reduce the stockholders liabilities to those lenders.

Continuity of Life. Generally, a corporation continues to exist even after the death of a stockholder. Although perpetual existence is considered an advantage of incorporation, it may be of little value if a major stockholder (or other individual responsible for the company's success) dies, and no knowledgeable person is left to carry on the business.

Centralized Management. Stockholders are not required to manage the business. A corporation's business affairs are managed by its board of directors, which are elected by the corporation's stockholders. That advantage is mitigated somewhat in closely held corporations, however, since the stockholders and members of the board of directors are often the same individuals.

Ability to Obtain Financing. Like partnerships, corporations generally have the ability to obtain financing through traditional bank borrowing arrangements. Corporations, however, also have the option to obtain financing by selling different types of securities (such as stocks or bonds).

Ease in Transferring Ownership. Ownership in a corporation is evidenced by issuing shares of stock. Generally, it is easier to sell shares of stock than to sell an interest in a noncorporate entity. That advantage may be of little value to closely held corporations, however. Shares of stock in closely held corporations do not always have a ready market and can be difficult to sell. In addition, buy-sell agreements between corporations and their owners may restrict the transferability of shares.

Benefits. Corporations enjoy favorable tax treatments of certain employee benefits that are not available to noncorporate entities. For example, C corporations may deduct the cost of the following expenses generally without their being taxable to employees:

• Group-term life insurance.
• Accident or health plans.
• Dependent care assistance.
• Meals and lodging furnished for the convenience of the employer.
• Pension and profit-sharing plans. (Employees will pay tax on the employer's contributions, but only when they receive the benefits under the plan at a later date.)
• Deferred compensation. (Employees will pay tax on the compensation when they receive it at a later date.)

Disadvantages of Incorporation
The following paragraphs discuss areas that generally are regarded as disadvantages of incorporation.

Administrative Burden of Incorporating. For a business to incorporate, legal documents (such as bylaws and articles of incorporation) must be drafted, and stockholder and board of director meetings must be held and documented. Corporations also may be subject to state and local franchise tax reporting. In addition, if they conduct business in a state other than the state incorporated in, they must obtain licenses to operate in other states. Thus, in some instances, operating as a partnership or proprietorship may be less costly and less burdensome.

Cost of Incorporating. The expenses related to the incorporation of a business are generally more significant than those involved in the formation of a proprietorship or partnership.

Lack of Control by Stockholders. The stockholders in a corporation generally have less control over the company's operations than in other forms of business organization. Control of the business operations usually rests with the corporation's board of directors and officers. This disadvantage is mitigated somewhat in closely held corporations, however, since the stockholders and members of the board of directors are often the same individuals.

Qualification Requirements. It is sometimes necessary for a corporation to formally qualify to do business in states other than the one where the company is incorporated. State laws for each state in which the corporation intends to do business must be reviewed to determine the rules for operating a business within that state.

Unreasonable Compensation. The IRS may question the amount of compensation paid to stockholder-employees. If payments from a corporation to a stockholder-employee are determined to be unreasonably high, the IRS may treat the excessive amount of salary as a nondeductible dividend.

Potential Double Taxation on Liquidation. The 2003 Tax Act reduction of rates to 15% or less on long-term capital gains and qualifying dividends of individual taxpayers has at least partially reduced the double tax detriment. Corporations are taxed on the gains from the sale or distribution of assets. (The distribution is considered to be a sale at the fair market value of the assets.) Stockholders are also taxed on distributions received from corporations that exceed the basis of their stock.

Setting Financial Objectives
Financial objectives provide the direction you need when establishing a budget. The guidance objectives ensure that your budgeting decisions relate back to promoting the overall financial health of your business. Without objectives, you risk making budgeting decisions that are misguided or simply not as effective as they could be.

In order to set effective objectives, you can follow four steps:

1. Review previous accounting periods to determine the strengths and weaknesses
2. Set objectives that address strengths and weaknesses
3. Decide what resources are needed to achieve objectives
4. Make adjustments to objectives if necessary

Review Previous Accounting Periods. Since the first step of creating a budget is to analyze financial statements from previous accounting periods, you have already identified the strengths and weaknesses of your business's financial operations. Use the figures provided from the ratio analysis to determine which financial activities are in need of improvement and which ones are healthy.

Address Strengths and Weaknesses. Once you have determined which financial activities are inadequate, create objectives that address these weaknesses. Since you also identified which financial activities are strong, you can use this information to direct your efforts toward the areas that truly need attention.

For example, if your days sales outstanding is poor, you might decide to set a somewhat ambitious objective that decreases the amount of time it takes after making a sale to collect money from a customer. Conversely, if your debt-to-total-assets ratio is strong, you could set an objective that was less ambitious for decreasing the amount of debt your business owes.

What Resources Are Needed? It is important that you examine your objectives to determine if you have the resources necessary to achieve them. If the resources are unavailable, it will be impossible to meet your objectives.

For example, imagine that one of your objectives for the upcoming accounting period is to improve your total assets turnover ratio by increasing the number of sales your company makes. You would have to determine whether or not you have the manpower available to accomplish this objective. Specifically, you would have to decide if you have enough sales people to handle the increase in projected sales.

Make Adjustments to Objectives. If you discover that you do not have sufficient resources to meet your objectives, you must adjust your objectives appropriately. Slight modifications might be all that are necessary to make your objectives achievable. However, a more creative strategy might be required to adjust your objectives.

For example, imagine that you do not have enough sales people to generate an increase in sales by a certain percentage. You'll have to adjust your objective to reflect a lower, more reasonable figure and look for another financial activity that could be used to accommodate this adjustment, such as increasing your sales price or lowering sales commissions.

Characteristics of Objectives
Any objective you set for your budget should possess three characteristics:

• Relevant
• Measurable
• Realistic

Relevant. Your objectives must be relevant to your business's vision. They must directly relate to improving your company's financial health. Objectives are sometimes set purely for the sake of setting them, without fully considering how they contribute to achieving the business's overall goal.

Measurable. Effective objectives are measurable. You must specifically articulate what needs to be achieved. Immeasurable objectives will not allow you to gauge your progress toward achievement.

For example, if you want to lower the percentage of your business's assets that are funded by creditors, choose a specific number by which to gauge your progress.

Realistic. In order to ensure successful achievement, your objectives must be realistic. Objectives can be challenging, but should never be impossible. Avoid the desire to set lofty objectives, regardless of the potential payoffs. Goals that are impossible to achieve will frustrate managers and employees and often lead to detrimental financial outcomes.

Common Budgeting Problems
There are several common problems that individuals encounter when establishing a budget. By being aware of these problems, you can avoid letting them affect your objectives.

Losing sight of your objectives
Failing to keep objectives realistic
Practicing historical-base budgeting
Accepting arbitrary changes
Believing that sales have to increase

Losing Sight of Your Objectives. Sometimes the process of putting together a budget seems so daunting that the individuals responsible for creating it focus more on the process involved than the objectives. For this reason, it is important that you focus every decision toward your objectives. In addition, regularly monitor your progress toward achieving your objectives in order to emphasize their validity and role as the focus of your efforts.

Failing to Keep Objectives Realistic. There is a common tendency for individuals to get rich on paper and then become disappointed when the numbers on the budget do not match actual performance. Therefore, it is crucial that you compare all objectives for the upcoming accounting period with actual performances from previous periods.

In addition, carefully examine all assumptions made about the financial activity for the upcoming accounting period. Base your objectives on solid facts, not on word-of-mouth speculations.

Practicing Historical-Base Budgeting. Historical-base budgeting is the process of basing your objectives for the upcoming accounting period on the previous one's actual performance. Some individuals automatically use the previous accounting period's performance as the budgeted amount for the upcoming period.

The problem with this budgeting method is that consideration is often not given to whether the previous accounting period's performance was good or poor. If the financial activities from the previous accounting period were inadequate, using these figures as a guideline for the upcoming accounting period will simply prolong poor performance.

Accepting Arbitrary Changes. Objectives are set for a reason: to guide positively the financial activities for an upcoming accounting period. Therefore, any deviations from the plan for achieving an objective should be questioned and, if necessary, stopped. Accepting arbitrary changes undermines the validity of your objectives. If a change to the budget is requested, it should be closely studied before being implemented.

Believing That Sales Have to Increase. It is often believed that sales have to increase with each new accounting period. In fact, some individuals think that if sales do not significantly increase each accounting period the company's efforts have been a failure. However, this viewpoint is incorrect. There might be accounting periods in which an increase in sales could create negative effects for the company.

For example, imagine that your company recently expanded its consumer base with the opening of new stores. As a result, sales increased significantly. However, to repeat the same strategy for the upcoming accounting period could be a serious error, since concentrating efforts on new stores could result in neglected customer support service for the stores recently opened. Therefore, the objectives for the new accounting period would not include an increase in sales, but a steady hold on current sales numbers wile customer service efforts are refined.

Monitor Performance
The key to monitoring your business's actual performance during an accounting period is to record it regularly on paper, so it can be compared to the budgeted amount. Businesses use "pro forma "financial statements to accomplish this task.

"Pro forma" Financial Statements
A "pro forma" financial statement is a forward-looking document; "pro forma" means "provided in advance." Unlike most financial statements that are created at the end of an accounting period, "pro forma" statements are created when setting a budget, before an accounting period. "Pro forma" financial statements are used to establish the projected financial activity for an upcoming accounting period. "Pro forma" financial statements are also often called estimates.

It is important to keep in mind that the financial statements that are created at the end of an accounting period are included in a business's annual report and, therefore, visible to external parties. However, "pro forma" financial statements are only used for internal purposes and are not viewed by parties outside of the company.

Since "pro forma" financial statements are for internal use only, the number of these documents will vary from business to business. In fact, the ways in which a company can customize its "pro forma" statements to fit its specific needs are almost limitless. However, many large businesses use "pro forma" Income Statements, Balance Sheets, and Cash Flow Statements. Out of these statements, the "pro forma" Income Statement is most common and widely used among businesses.

Some businesses also create "pro forma" financial statements based on the different segments of their company that contain financial activity. For example, a company might create "pro forma" financial statements that are specific to sales, production, manufacturing, and labor, among other areas.

Create a "Pro Forma" Financial Statement
There are seven steps that will help you prepare a "pro forma" financial statement:

1. List the line items
2. List historical performance
3. List the percentage of sales
4. List the upcoming accounting period's budgeted amount
5. Create a column for the month or quarter
6. Create a "year-to-date" column
7. Create a deviation column

Making Accounting Adjustments - Recognizing Revenues and Costs
This article provides guidance on when and how to recognize certain revenues and costs in a small business. It discusses policies for recognizing general revenues, cost of sales, and gains and losses on fixed asset transactions.

Revenues
Bookkeeping personnel should recognize a sale as revenue only when the revenue has been earned, generally when the goods or services have been delivered to the customer. Revenue should not be recognized when the contract is signed or the order is taken. The typical sales transaction is recorded by simply debiting accounts receivable and crediting sales for the invoice amount. (Bookkeeping personnel would also record any related costs of sales).

In most small businesses, the sales invoice triggers the general ledger entry to recognize revenues. However, as discussed in the following paragraphs, recognizing revenues based on customer billings may not be appropriate in certain situations.

Delayed Billings. There is often a delay between when the goods or services are delivered and when the customer is billed. This delay generally does not pose a day-to-day problem for bookkeeping personnel. However, at month ends, bookkeeping personnel should prepare a journal entry to accrue the revenues related to those goods that have been shipped but not billed. The entry should simply debit accounts receivable and credit sales. In addition, bookkeeping personnel should prepare a journal entry to reverse the entry in the following month. Bookkeeping personnel should also ensure that the related costs of sales have been recorded in the same period.

Advance Billings. If a customer is billed in advance, however, bookkeeping personnel should generally defer the amount until the related goods or services are delivered or provided. For example, assume a customer is billed $2,400 under a six-month maintenance agreement. Bookkeeping personnel should make the following entry to record the initial transaction:

If, however, the bookkeeping system made an automatic entry to record accounts receivable and revenue (instead of deferred revenue) when the sales journal was posted, bookkeeping personnel would simply make a period-end adjusting entry to debit revenue and credit deferred revenue.

At the end of each month, bookkeeping personnel typically would make the following entry to recognize one-sixth of the amount as revenue:

Cost of Sales
Accounting principles require that cost of sales be recorded in the same period as the related revenues to properly match revenues and expenses. Many bookkeeping systems are designed to automatically record cost of sales at the same time sales are recorded. However, if the company does not maintain a perpetual inventory system (a subsidiary ledger listing inventory items and their costs) or a system to automatically record cost of sales, a month-end entry must be made to record estimated cost of sales.

The approach used to estimate cost of sales depends on various factors, such as the company's inventory valuation method and type of business. Because of its complexity, the cost of sales estimation process is often handled by the company's controller or outside CPA. However, in companies where bookkeeping personnel are expected to calculate and prepare monthly cost of sales estimates, the cost of sales percentage method (also called the gross profit method) is frequently used.

Companies that use the cost of sales percentage method generally record cost of sales by using the historical cost of sales percentage. For example, assume the company's cost of sales percentage historically averages about 65% of sales. If monthly sales were $10,000, bookkeeping personnel would make a journal entry to record cost of sales of $6,500. Assuming inventory purchases during the month were recorded to the inventory asset account in the general ledger, bookkeeping personnel would prepare the following entry:

Alternatively, assume inventory purchases were recorded during the month to the cost of sales account in the general ledger. If the monthly total in the cost of sales account was $8,000, bookkeeping personnel would make the following entry to properly reflect inventory and cost of sales:

Under the cost of sales percentage method, bookkeeping personnel must also periodically adjust the inventory and cost of sales accounts when physical inventory counts are taken. After the physical inventory count has been taken and valued, inventory per the general ledger should be increased or decreased to agree with the physical inventory count total. Bookkeeping personnel should record the offsetting debit or credit to an inventory adjustment account (a subcomponent of the cost of sales account).

Fixed Asset Transactions
The sale or disposal of fixed assets often requires month-end entries to properly reflect the transactions. The following paragraphs provide guidance on recording gains or losses on fixed asset sales and trade-ins.

Gain or Loss on Fixed Asset Sales. When a company's fixed assets are sold, bookkeeping personnel often record the total sales proceeds by simply crediting a fixed asset gain/loss account or miscellaneous income account in the general ledger. At month end, an adjusting entry must be made to remove the fixed asset's cost and accumulated depreciation from the general ledger and record the proper gain or loss.

The appropriate gain or loss is calculated by comparing the sales proceeds with the asset's net book value (original cost less accumulated depreciation). A gain results if the sales proceeds exceed the net book value, and a loss occurs if the sales proceeds are below the net book value. To properly calculate the gain or loss, bookkeeping personnel must ensure that depreciation has been calculated through the date of sale.

To illustrate the calculation of the gain or loss on a fixed asset sale, assume the following facts:

In the above situation, income is overstated by $4,400 because the $5,000 sales proceeds were initially recorded to miscellaneous income. The adjusting journal entry needed to properly record the above transaction is as follows:

The journal entry properly writes off the fixed asset and accumulated depreciation amounts and recognizes the appropriate gain of $600 ($5,000 - $4,400). In addition to making the above entry, bookkeeping personnel should also ensure that the fixed asset amount and related accumulated depreciation have been removed from the fixed asset subsidiary ledger.

Gain or Loss on Fixed Asset Trade-ins. When a company acquires a fixed asset by trading in another fixed asset, bookkeeping personnel often initially record only the additional cash paid, if any, at the trade-in date by debiting the fixed asset account in the general ledger. At month end, bookkeeping personnel must decide whether an adjusting journal entry is needed to properly reflect the accounts.

When similar fixed assets are exchanged, a gain or loss is generally not recognized. The recorded amount of the new asset simply equals the net book value of the old asset plus any cash or other monetary consideration given to the other party. Thus, the initial entry made by bookkeeping personnel to debit fixed assets for the additional consideration paid is appropriate; no additional entry is generally needed. (If the transaction is significant to the company and cash or other monetary consideration paid is more than 25% of the fair value of the asset received, special accounting rules could apply. In that case, bookkeeping personnel should consult with the company's controller or outside CPA.)

Worker Classification
Introduction
In the broadest sense, all workers fall into one of two classes: employees of the business or independent contractors (i.e., self-employed businessmen who have contracted to perform work for the business). The process of determining whether a worker is an employee or an independent contractor is called "worker classification." A business must withhold and pay employment taxes on employee wages, provide employee benefits, and observe certain employee rights during employment. A business need not give independent contractors the same treatment. (In fact, some items such as qualified retirement plan benefits can be offered to employees only.) This difference leads some businesses to prefer hiring independent contractors.

Bookkeepers should be aware that different definitions of an employee and independent contractor apply for different purposes. The federal payroll tax laws, the federal wage and hour laws, state unemployment insurance coverage laws, and state workers' compensation laws use different definitions of these terms. (The federal wage and hour laws use an employee definition that is broader than the definition for federal payroll tax purposes. Many state laws also adopt a broader definition of the term "employee" than does the federal payroll tax laws.) Thus, a worker may be an independent contractor for federal payroll tax purposes, but an employee for federal wage and hour or state law purposes. This book is concerned with the federal payroll tax laws. Employers should be aware that a worker may be classified differently for other purposes.

Understanding the Worker Classification Process
Worker classification has generated controversy between taxpayers and the IRS for more than three decades. This key issue explains the rules that drive the worker classification process.

The following three rules drive the worker classification process. The common law control rules and statutory worker occupation rules are used to classify workers as employees or independent contractors. The Section 530 rules relieve employers of payroll tax liability in certain limited instances.

1. Common Law Control Rules. Over the years, the courts have developed the concept of common law employees and common law independent contractors in precedent-setting case law. Under this concept, employees are workers over which the business may legally control and direct both (a) what must be done, and (b) how it must be done. Independent contractors are workers over which the business may legally control and direct only what must be done. The business may not control how, when, or where the work is performed. The IRS has identified from this case law common law factors that they believe most clearly show the degree of control between the worker and the business and have grouped these factors into three general categories of evidence: behavioral control, financial control, and the type of relationship between the parties.

   Classic examples of independent contractors include individual lawyers, doctors, dentists, CPAs, architects, veterinarians, and others offering services to the public. (However, any of these may be employees if an employer legally controls both what and how work is done.)

   Note: An individual who is an employee under the common law control rules generally is treated as an employee for all payroll tax purposes. However, such a person can be classified as a nonemployee because of certain statutory worker occupation rules (see item 2). Similarly, a person who is not an employee under the common law control rules may nonetheless be classified as an employee under the statutory worker occupation rules. Finally, if the Section 530 rules apply (see item 3), an employer is relieved of its federal payroll tax liability for certain workers (i.e., common law employees and statutory employees), even though such workers are employees.

2. Statutory Worker Occupation Rules. The Code's payroll tax statutes provide certain exceptions to the common law rules of employees and independent contractors. For example, FICA defines certain full-time life insurance salespersons as statutory employees, irrespective of their status under the common law control rules. The federal income tax withholding (FITW), social security and Medicare (FICA) tax, and federal unemployment (FUTA) tax statutes each have their own lists of statutory employee occupations. [See IRC Secs. 3401(c), 3121(d), and 3306(i).] Similarly, FITW defines certain real estate agents and direct sellers as statutory nonemployees (also called statutory independent contractors), irrespective of their status under the common law rules. FICA and FUTA also list these same occupations as statutory nonemployees.
   
   
3. Section 530 Rules. In response to taxpayer complaints that the IRS was arbitrary and inconsistent in its application of the common law control rules and was reclassifying too many workers as employees, Congress enacted Section 530 of the Revenue Act of 1978. This legislation (known as Section 530 relief) was intended as a stopgap measure to minimize the controversy between taxpayers and the IRS until a comprehensive legislative solution could be crafted. The focus of Section 530 was to prevent the IRS from reclassifying workers if the business could prove it had consistently treated the worker as an independent contractor in the past and had a reasonable basis for doing so. The text of Section 530 was not formally integrated into the Code. Because it was intended to be a temporary measure, Congress made it a stand-alone piece of legislation. This elective provision overrides both the common law control rules and the Internal Revenue Code statutory occupations. This is true even if the worker might otherwise be an employee under the common law or statutory employee rules.

Under the Section 530 relief provision, a worker is deemed to be an independent contractor if the employer (a) has historically treated the worker's occupation (and similar occupations) in this manner, (b) has complied with certain information return requirements, and (c) has a reasonable basis for treating the worker as an independent contractor. (There are several different ways to meet this reasonable basis requirement.) Section 530 terminates the employer's liability for employment taxes but has no effect on the workers or their standing as employees for other purposes, such as for qualified plan status.

Each rule is but one component of the worker classification process. Thus, the bookkeeper must apply all components when classifying workers. The component rules group workers into four different categories: common law employees, statutory employees, common law independent contractors, and statutory nonemployees (i.e., statutory independent contractors). For payroll tax purposes, a common law employee generally is treated the same as a statutory employee. Likewise, an independent contractor is treated the same as a statutory nonemployee.

QuickBooks Setup Procedures - Defining Preferences
QuickBooks provides more than 100 preference options, allowing users to customize how the software looks and acts and to specify the functions that are available. Thus, to a certain degree, QuickBooks can be set up to meet the unique needs of the company and the personal work styles of the users. To define preferences, choose "Edit" from the menu bar and "Preferences." Icons for the various areas for which preferences may be established appear on the left of the "Preferences" window as the following illustrates:

Note that each preference area has tabs for "My Preferences" and "Company Preferences." "Company Preferences" apply to all users of the application and can be made only by the QuickBooks Administrator and while in single-user mode. "My Preferences" apply only to the individual user who sets them. ("My Preferences" are not available for all areas.)

To change "Company Preferences," all users except the administrator must be logged off and QuickBooks must be set to single-user mode. All preferences can be returned to their default settings by clicking the default button in the "Preferences" dialog box. Most preferences are self-explanatory; however, many have an impact on other areas of QuickBooks. The following paragraphs discuss each preference and provide guidance for selecting them.

Accounting
In the "Accounting" preferences dialog box, the following may be set:

• Use Account Numbers. Selecting this option may make it easier to locate individual accounts when there are numerous accounts and to identify the type of account. When this option is selected, account numbers will be used in addition to account names.

• Show Lowest Subaccount Only. This option allows the user to see only the subaccount (not both the parent account and subaccount) when making transaction entries. This may be useful since the field display length is limited and otherwise would require the user to scroll through the field to view the entire account number or name.

• Audit Tracking Is Always On. QuickBooks keeps a record of all changes made to transactions. An audit trail report can then be printed that shows each transaction and any changes that were made.

  Note: In QuickBooks 2005 and earlier versions, users had the option of disabling the audit trail by clearing the "Use Audit Trail" box in the "Company Preferences" tab. The audit trail preference should be enabled. Doing so provides reviewers with an account activity history, allowing them to quickly determine why an account may have changed.

• Require Accounts. This option prevents a transaction from being recorded without assigning it to an account. If this preference is not selected, unassigned transactions will be posted to the "Uncategorized Expenses" or "Uncategorized Income" accounts.

  Note: While it generally is a good idea to require accounts, it may be preferable to allow some transactions to be posted without specifying an account. That way, users who are not familiar with the chart of accounts or are unsure where to post a transaction can still record the transaction and, rather than guess and possibly post it to the wrong account, leave it unassigned. Later, the professional bookkeeper or another reviewer can easily locate all unassigned transactions and assign them to the proper accounts.

• Use Class Tracking. This option allows users to group items and transactions for reporting (including department, location, or business type). Reporting by class may be better for the user than creating a large chart of accounts with separate subaccounts. The user can also choose to be prompted to assign a class.

• Closing Date. This option allows the administrator to set a password-protected closing date. When this is set, QuickBooks requires the password to make any changes to periods that have been closed.

• Automatically Assign General Journal Entry Number. When this option is activated, QuickBooks assigns a number to a general journal entry. If the box is unchecked, the journal entry number will be blank and must be manually entered.

• Warn When Posting a Transaction to Retained Earnings. When this option is activated, QuickBooks displays a warning when the user tries to post to the Retained Earnings account.

  Note: This option is available in QuickBooks 2005 or later versions.

Checking
In the "Checking" preferences dialog box, the user can tell QuickBooks to initially place the cursor at the payee field when checks are being written. Thus, the payee will be the first item entered when a check is written or a bill is paid. Other "Checking" preferences include printing account names on check vouchers, warnings about duplicate check numbers, changing the check date to the print date, and activating autofill of the payee account number. QuickBooks allows the user to set default accounts for several forms in the "Checking" preferences dialog box, including "Write Checks," "Pay Bills," "Pay Sales Tax," etc. QuickBooks automatically opens the form with the default account chosen.

Note: This feature is useful if the company has multiple checking accounts. When performing a transaction, QuickBooks provides a drop-down list and the user selects the appropriate account. For example, if the company uses its bank account at Regents Bank when paying its payables and its account at Bank of the North for payroll checks, it can designate those accounts as the defaults for the particular transactions. If a default account is not designated, the last account used by the particular transaction is selected by QuickBooks.

Desktop View
Whether or not to show the home page when opening a company file and how the desktop is shown can be changed in the "Desktop View" "My Preferences" dialog box. Users can also change the QuickBooks color scheme, add sound, etc., that will be used when they log onto their computers on the "My Preference" dialog box. These do not impact other company users of QuickBooks. The "Company Preferences" dialog box can be used to customize the Home page. Users can select the features they wish to appear on the Home page.

Note: QuickBooks 2005 and earlier versions do not have a Home page. Therefore, the "Company Preferences" dialog box is not available in those versions.

Finance Charge
In the "Finance Charge" preferences dialog box, the user can make changes to the way the company assesses finance charges. The user can specify the interest rate to charge, the minimum finance charge, the grace period allowed before finance charges are imposed, the account to which the finance charge should be recorded, when QuickBooks should begin calculating finance charges, and whether to assess finance charges on finance charges.

General
"General" preferences that can be changed include the time and year formats and whether to update name information when saving transactions. QuickBooks default is to prompt the user to update name information when list items are changed during transaction entry. (For example, addresses of customers, vendors, or employees on the item list may be updated during transaction entry.) The user may select the "Never update name information when saving transactions" so the option is not available.

Integrated Applications
In the "Integrated Applications" preferences dialog box, users can control the way integrated applications are allowed access to the QuickBooks company file. They can allow or deny individual applications to access QuickBooks and they can choose whether or not QuickBooks will notify the user before running any application whose certificate has expired.

Jobs & Estimates
In the "Jobs & Estimates" preferences dialog box, progress invoicing and estimating can be turned on and job status terminology can be changed. The user also can choose to have QuickBooks warn about duplicate estimate numbers and to print items with zero amounts.

Payroll & Employees
Numerous payroll preferences can be established depending on how payroll is processed.

Purchases & Vendors
Inventory/purchase order tracking is turned on from the "Purchases and Vendors" preferences dialog box. Other preferences include warning if inventory is too low, warning about duplicate purchase order numbers, specifying the date bills are due, and warning about duplicate bill numbers. The QuickBooks user also can determine whether to automatically use discounts and credits.

Reminders
In the "Reminders" preference dialog box, users can designate how many days in advance to be reminded to pay bills, print forms, print checks, deposit money, or enter memorized transactions. Personal preferences include whether to show the reminder list when a company file is opened.

Reports & Graphs
In the "Reports and Graphs" preferences dialog box reports may be displayed on an accrual or cash basis. The aging date for reports and report formatting preferences also may be changed. In addition, users can classify accounts in the statement of cash flows.

Sales & Customers
Shipping methods, markup percentages, and FOBs can all be changed from the "Sales and Customers" preferences dialog box. The user also can choose to track reimbursed expenses as income, automatically apply payments to open invoices, have QuickBooks warn about duplicate invoice numbers, choose to track price levels, and choose a template for packing slips. In QuickBooks Premier and Premier-Accountant, users can enable sales orders, warn about duplicate sales orders, and choose whether or not to print items with zero amounts.

Sales Tax
The sales tax feature is turned on in the "Sales Tax" preferences dialog box. The user also can make changes to how QuickBooks handles sales tax. Users can specify the sales tax payment frequency (e.g., monthly, quarterly, or annually), the most common sales tax, the sales tax due date, and whether QuickBooks should mark taxable items when invoices are printed. Default sales tax codes can be set to allow users to track why sales are taxable or nontaxable.

Send Forms
In the "Send Forms" preference dialog box, users can change the default cover letter for invoices, estimates, statements, sales orders, sales receipts, credit memos, purchase orders, or reports they send by fax or email.

Service Connection
In the "Service Connection" preference dialog box, users can specify how they log in to QuickBooks services. There are two choices: "Automatically connect without asking for a password" or "Always ask for a password before connecting." The checkbox "Allow background downloading of service messages" may be checked to automatically download service updates.

Spelling
Spell check can be turned on or off in the "Spelling" preferences dialog box.

Tax: 1099
1099 tracking is turned on in the "Tax: 1099" preferences dialog box. The user also can assign general ledger accounts to 1099 categories and change 1099 threshold amounts. Paragraph 302.16 discusses 1099 preferences in further detail.

Time Tracking
Time tracking is turned on from the "Time Tracking" preferences dialog box. The user should enter the first day of the work week in this screen if the preference is selected.