Accounting Is More Than Numbers – Different Versions for Different Reasons
In addition to you, there may be a lot of people who want to see how your business is doing. This includes your own employees, who may need to track particular numbers to get their jobs done; your accountant, who needs the numbers in order to prepare your tax returns; and the IRS, which needs the numbers so it can collect whatever taxes you or your company may owe. These people don’t all need the same information, though, and may not need it in the same form.
When you’re looking over the ﬁnancial results for your company, you’ll probably want to see a lot more detail than you would be willing to show outsiders. For example, while you would report your total sales on your tax return, you wouldn’t really want to send in a breakdown of which customers bought what. That information doesn’t help the IRS determine whether you ﬁgured out the right tax payment. It can, however, help you ﬁgure out things such as whether your company is relying too heavily on sales to a single customer.
Give Them What They Want
You’ve got a bunch of people asking you for ﬁnancial statements, but they all want something different. What do you do? First, look at who’s doing the asking. If it’s a tax authority, you have to give him the numbers in the format requested; the same goes for your loan ofﬁcer. These guys may look at hundreds of ﬁnancial statements every week, and they need them to be consistent.
For people on the inside, or consultants that you’ve hired, you can pre- pare special versions or just make do with what you already have. With most accounting software packages, though, it’s pretty easy to pick and choose what information you want on each report. For example, you can run a report with just the current numbers, or run it to include both this period and last period for comparison purposes.
A good rule to remember if you fill out your own tax forms is this: Don’t report more than the forms ask for. Fill in all the requested numbers, and stop. Don’t explain, and don’t add details. When you provide extra information, you could be flagging your return for audit. Audits are not necessarily bad—they could decide you did everything correctly—but they are generally not pleasant.
When the Numbers Are Different
You’ve probably heard the phrase “two sets of books,” usually involving an agent and an arrest warrant. The truth is, though, that some companies keep one set of books for tax purposes, and another for everyday accounting. While there may not be two separate physical ledgers, some accounts have two sets of balances and different transaction streams.
Why bother with that? For tax purposes, you have to follow IRS requirements, even when they don’t make perfect sense for your business. Even some ﬂexible areas, such as certain expense calculations, may work differently for book purposes (meaning your internal books) and tax purposes (meaning what you put on your tax return). The biggest reason for having different numbers here is taxes: When it comes to income taxes, you want to show the lowest possible income because that means the lowest possible tax bill. For your own purposes, though, you may want to use the most realistic numbers, even if those would have left you with a bigger tax burden. It’s ﬁne to do that, as long as you let anyone who needs to know (such as your loan ofﬁcer, who will see both versions) that you’ve done it.
For small businesses, it’s just plain simpler to track one set of numbers. Since you have to do certain things for the IRS, it’s easiest to use those ﬁgures for your own books. If you decide you’d like to see how things would have worked out if you had used a second set of numbers (a different inventory number, for example), you can always ﬁgure that out on the side.