Top Dental Bookkeeping Mistakes
Dental practices can cost themselves hundreds or even thousands of dollars by making relatively simple accounting mistakes. Here, the CPA and accounting professionals at Only for Dentists detail the top dental bookkeeping mistakes.
Recording Transactions in a Previous Period
Dental practices should “close their books” at the end of every month, which includes reconciling all of the various accounts and preparing financial statements. Closing the books on a monthly basis helps practices catch major mistakes—such as transactions being recorded in the wrong month—which can lead to discrepancies between balance adjustments and financial reports. These discrepancies can cause a myriad of problems, and could even incur penalties from the IRS. Closing the books each month is an easy fix to a potentially destructive problem.
Forgoing an Industry Standard Chart of Account
The chart of account is an accounting tool that lists each type of item for which money or credit is spent or received. For dental firms, this will include a list of clients, insurance companies, office expenses, payroll and more, all with their corresponding expenditures or payments received. While standard charts of accounts exist, one developed specifically for the dental industry can help dental firms better manage their accounts, streamline expenses and determine how to better increase profits.
Confusing Cash Flow with Profit
A dental firm’s profit and cash flow are two separate and unique entities, and understanding what each entail is critical to dental accounting success. Profit is determined by subtracting total expenses from total revenue. An indication of profit is not an indication that there is necessarily cash available for large purchases: the cash flow statement will determine this. Cash flow is the amount of money coming into and out of a dental practice’s bank account every month, and is measured by the cash flow equation, which factors in accounts receivable, inventory and depreciation expenses.
Failing to Properly Classify Personal Expenses and Distributions
Dental practitioners who work for their own firm will either take a salary or regular distributions, depending on the structure of their practice. If a practitioner takes cash distributions, they should not be listed under expenses for the firm, as they are neither salary nor payroll. Failing to properly classify distributions can lead to a firm underpaying their taxes. Furthermore, it is important to understand that personal expenses, such as individual estimated taxes, personal food and drink, entertainment or similar expenses are not tax-deductible, and should also be recorded as distributions.
Choosing a General Practice Accountant
Dentists are specialized practitioners with specific needs, so why shouldn’t their CPAs specialize in the unique needs of dental professionals? As our name implies, Only for Dentists is dedicated solely to helping dental practitioners and their firms with their accounting needs. This helps prevent costly mistakes, allows dental firms to maximize profits and ensures practitioners receive the specialized assistance they need, whether during tax time or year-round. For more information, contact Only for Dentists today!
Why You Must File and Pay Your Employee’s Withholdings on Time
There is zero wiggle room when it comes to handling the federal income taxes and FICA taxes withheld from employees’ paychecks. The taxes are government property, which employers hold “in trust” and then remit to the IRS on a set schedule. Employers are not permitted to use this “trust fund” money for other purposes.
Serious Penalty
The penalty for breaking the rules is harsh. Any person involved in collecting, accounting for, or paying the trust fund taxes — a “responsible person” — who willfully fails to do so may be liable for a penalty equal to 100% of the unpaid taxes. The penalty is aggressively enforced.
Responsible Persons
Generally, a responsible person is anyone with the power to see that the taxes are paid. This might include a corporation’s officers, directors, and shareholders; employees; and the partners in a partnership. Under certain circumstances, even family members and professional advisors may be subject to the penalty.
It’s not uncommon for there to be more than one responsible person. When that’s the case, each responsible person could be found liable for the full penalty.
A Word About Willful
Failure to pay trust fund taxes can be willful without being an intentional attempt to evade paying the taxes. Temporarily “borrowing” from the trust fund to meet bona fide business expenses in a pinch can qualify as being willful.
What is a PEO?
The acronym PEO stands for “professional employer organization.” These organizations help businesses reduce costs by allowing them to outsource the management of important company functions, such as workers’ compensation, payroll, employee benefits and human resources. By partnering with a PEO, a dental practice or other company can grow its bottom line and focus on its core tasks, such as marketing, production and customer service.
The Function of a PEO
When a dental practice begins working with a PEO, the PEO takes over many of the company’s most cumbersome human resource responsibilities. In addition to handling everyday human resource tasks, the PEO also assumes some of the employer’s legal responsibility for human resource issues, such as unemployment and healthcare, thus reducing the employer’s level of risk.
Once the employer establishes his relationship with the PEO, the PEO begins functioning as a second employer for its clients employees. Instead of coming to their legal employer with human resource concerns, employees will go to the PEO. The PEO manages all of the company’s human resource dealings on a daily basis, and the company no longer needs to worry about the accuracy of its payroll or whether its healthcare plan complies with federal regulations. Many PEOs even offer a comprehensive benefits package for employees that allows the PEO’s clients to become more competitive within the industry.
Benefits of a PEO
The business industry is always evolving. Congress enacts new laws, such as the recent change to healthcare regulation, and businesses must alter their procedures to comply with the new guidelines. When a company is small, keeping up with the constant changes can be nearly impossible. Instead of focusing on their most important tasks, employees are forced to spread themselves too thin. Furthermore, because employees are inexperienced in these areas, tasks are not completed as accurately and efficiently as they should be.
When a dental practice hires a PEO, most of these problems disappear. Instead of relying on its own overworked and under-prepared employees to handle unemployment insurance claims, payroll tax compliance, workers’ compensation claims and issues with employee healthcare, companies can rely on a PEO’s experts to take care of all of these obligations. Not only are these facets of the company’s operations dealt with more effectively, but employees also find themselves with more time to concentrate on activities that produce revenue for the company. Furthermore, all human resource tasks are completed with efficiency, and the company’s bottom line improves.
Why Small Businesses Need Agreements in Writing
Small businesses often capitalize on their less formal, more personal, approach to their customers and clients. While there is nothing wrong with this approach in general, it should not extend to business agreements and legal matters. On the contrary, a small business, including dental practices, should insist on reducing all agreements to writing just like their larger counterparts do.
Regardless of what type of small business you own, chances are your customers or clients are drawn to the fact that you are able to provide more personalized attention without the need for them to follow inflexible procedures or go through three different people before they can speak to someone who can help them. The informality of your business, however, should stop there.
Unfortunately, disputes occur in all businesses. Whether it is a dispute with a supplier, an advertiser, a customer, or a landlord, it can-and most likely will-happen at some point in time. When a dispute arises, documentation is the key to settling the dispute. If your dispute ends up in court the law always favors a written agreement over a verbal agreement. Having the agreement in writing to begin with, however, creates an excellent chance that you will be able to resolve the dispute outside of the courtroom.
Many disputes are the result of honest misunderstandings. A smaller percentage of disputes are the result of unscrupulous individuals trying to take advantage of new, potentially naive, small business owners. Either way, having a written agreement that clearly outlines the terms and conditions of your practice with an individual or company ensures that you are prepared to defend yourself should a dispute arise for any reason.
As a small business owner you are likely working with a very tight budget and are therefore hesitant to spend money on legal fees charged to draft agreements. While this is certainly understandable, you should look at written agreements as a type of insurance. A relatively small outlay of funds now will protect you from a much greater expense down the road. If a dispute arises and you have no written agreement to back up your position there is a much higher probability that the dispute will turn into a lawsuit. A lawsuit, in turn, will require you to hire an attorney. Your attorney fees to defend a lawsuit will be substantially higher than they would have been to draft a written agreement that could have prevented the lawsuit.
You have undoubtedly worked hard to get your dental practice off the ground. By insisting on written agreements in all of your transactions you are helping to protect your investment and ensuring the future success of your business.
What is the Future of Cloud Computing for Dental Practices?
A recent survey conducted by North Bridge Venture Partners and in conjunction with GigaOM Research reveals that the state of cloud computing is strong. 68 percent of business and IT respondents to the survey see “the cloud” as a tool for bringing equal or even improved TCO (total cost of ownership) to their organizations.
Among businesses and IT companies that participated in the study, cloud adoption in businesses was up to 75 percent in 2013 from 67 percent the year before. Current expectations for 2014 are that the on a global scale, cloud computing will become a $158.8 billion industry this year.
What Makes Cloud Computing So Attractive?
While agility and scalability are the primary reasons for turning to the cloud, cost is another major motivator for dental practices that adopt cloud computing. These advantages, while substantial and important, are not the only reasons dental practices in the future will be looking to the cloud.
Why is Cloud Computing Growing So Fast?
There are many reasons more dental practices are looking to cloud computing as an option for their business. The highly versatile nature of “the cloud” makes it attractive for dental practices of all shapes and sizes. The cost savings over maintaining private servers is another main attraction as is the scalability of cloud services that allows dental practices to add or remove services as needed.
Concerns Regarding Cloud Computing
It’s not all sunshine and rainbows though. There are some potential problems and concerns to be aware of when it comes to business computing in the cloud. Reliability is one of the most critical concerns. Many businesses rely on the cloud in order to conduct their business – they cannot function when the cloud is down. Even big names in the industry like Amazon have had incidents when their services failed and people were unable to access documents and programs stored on the cloud.
Other issues include security, concerns over regulatory concerns (and/or lack thereof), privacy, and the complexity of working within the framework of the cloud. These are all valid concerns that roughly 76 percent of businesses have considered and found to pale by comparison to the rewards of conducting business in the cloud.
What Does the Future Look Like?
While the state of cloud computing is strong today, this industry is one that’s poised for growth in the future. Despite reservations some small firms may have about adopting the technology and the benefits it represents, trends show that many dental practices are planning to adopt cloud computing in the coming years while looking for ways to expand its use to meet more of the business needs. In addition, dental practices will aim to provide a safer point of access for workers while safeguarding vulnerable data.
Small dental practices interested in cutting costs will do well to consider the potential benefits cloud computing might deliver for your business. Those who have already incorporated the cloud into your business might look for new ways to make it work for you including data storage, backup data center, and as a point of access for employees who need to access sensitive data.
18 Accounting Terms You Should Know
It’s back-to-school time. Learning is not just for children. Why not take a page from the kids’ books and do some learning of your own?
QuickBooks is easy to use, intuitive and flexible. But it is not an accounting manual or class or tutorial. If your dental practice is exceptionally uncomplicated, you might get by without knowing a lot about the principles of bookkeeping.
Still, it helps to understand the basics. Here’s a look at some terms and phrases you should understand.
- Account. You’ll set up financial accounts like checking and savings in QuickBooks, but in accounting terms, this refers to the accounts in your Chart of Accounts: asset, liability, owners’ equity, income and expense.
Figure 1: A QuickBooks Chart of Accounts - Accounts Payable (A/P). Everything that you owe to vendors, contractors, consultants, etc. is tracked in this account.
- Accounts Receivable (A/R). This account tracks income that hasn’t been realized yet, Accrual Basis. This is one of two basic accounting methods. Using it, you record income as it is invoiced, not when it’s actually received, and you records expenses like bills when you receive them. Using the other method, Cash Basis, you would report income when you receive it and expenses when you pay your practice’s bills.
- Asset. What physical items do you own that have value? This could be cash, office equipment and real estate. In QuickBooks you’ll be managing two types. Current Assets are generally used within 12 months (or you could convert them to cash in that length of time). Fixed Assets refers to belongings like vehicles, furniture and land, property that you probably won’t use up in a year and which usually depreciates in value. Depreciation is very complex; you may need our help with that.
- Average Cost. This is the inventory costing method that programs like QuickBooks Pro and Premier use to calculate the value of your stock.
Figure 2: QuickBooks provides a Statement of Cash Flows report.
- Cash Flow. This refers to the relationship between incoming and outgoing funds during a specific time period.
- Double-Entry Accounting. This is the system that QuickBooks uses � that all legitimate small business accounting software uses. Every transaction must show where the funds came from and where they went. Each has a Credit (decreases asset and expense accounts) and Debit (decreases liability and income accounts) which must balance out (other types of accounts can be affected).
- Equity. This refers to your dental practice’s net worth. It’s the difference between your assets and liabilities.
- General Journal. QuickBooks handles this in the background, so it’s unlikely you’ll ever be exposed to it. We sometimes have to create General Journal Entries, transactions required for various reasons (errors, depreciation, etc.) that contain debits and credits. Please leave that to us.
- Item Receipt. You’ll create these when you receive inventory from a vendor without a Job. QuickBooks often associates customers with multi-part projects that you’ve taken on, like a kitchen remodel.
- Net income. This is your revenue minus expenses.
- Non-Inventory Part. When you purchase an item but don’t sell it or you buy something and resell it immediately to a customer, this is what it’s called. It’s merchandise that isn’t stored by you for future sales.
- Payroll Liabilities Account. QuickBooks tracks federal, state and local withholding taxes, as well as Social Security and Medicare obligations, that you’ve deducted from dental employees’ paychecks and will remit to the appropriate agencies.
Figure 3: QuickBooks helps you track and remit Payroll Liabilities.
- Post. You won’t run into this term in QuickBooks. It simply refers to recording a transaction within one of your accounts.
- Reconcile. QuickBooks helps you with this. It’s the process of making sure your records and those of your financial institutions agree.
- Sales Receipt. This is how you record a sale when payment is made in full during the Statement. You’ll generally use invoices to bill customers in QuickBooks, but you can also send statements, which contain transaction information for a given date range.
- Trial Balance. This standard financial report tells you whether your debits and credits are in balance. Should you run this report and find a problem, let us know right away.
- Vendor. With the exception of employees, QuickBooks uses this term to refer to anyone who you pay as a part of your dental business operations.
These are just a few of the terms you should recognize and understand. We hope you’ll contact us when you need help understanding how the accounting process fits into your dental practice’s workflow.
Make QuickBooks Yours in 2014: Customize
QuickBooks software is used to help manage finances at small businesses including dental practices. It can be used as is (with some exceptions), but you can customize many elements to improve your workflow, your form output and your dental business insight.
While many of the things you purchase and use in your daily work and professional dental lives don’t come with options, many do. Think about the last time you bought a car, for example. Did you request additional features for safety or convenience or aesthetic value? Continue reading
Tax Audit Red Flag – You Have Assets Overseas.
Most people would rather pay a visit, fee and all, to the proctologist’s office than endure an IRS audit. In fact, many would agree that proctologists are kinder and friendlier than the average IRS auditor. Knowing the red flags that trigger audits may not prevent all audits, but it can help you invite less IRS scrutiny or unwanted attention.
In recent years, the IRS has turned its focus to US accounts in foreign banks. Where US citizens once set up tax shelters by banking in places like Switzerland or the Cayman Islands, new laws now levy substantial fines for failing to report holdings in foreign banks. Continue reading
Dentists: Here Are 8 Things You Should Know About IRS Audits
Yes, the word strikes fear in every taxpayer’s heart. Here are the basics.
You may know someone who’s been through an IRS audit. You’ve at least heard that it can be a grueling, complex process. But how much do you really know about this potentially unpleasant procedure? Here’s some of what every dental practice owner should know. Continue reading
5 Tips to Help Prepare for Tax Prep
Prepare for preparation? Yes, it’s more than a good idea. It can have significant impact on your tax obligation.
You know how onerous tax preparation itself can be. So you probably don’t like to even think about it until those deadlines loom.
But some planning and preparation done throughout the year can make it easier to face the IRS’ intimidating tax forms. Here are five ways to minimize the stress and anxiety you usually feel in the spring. Continue reading
Follow Us!