QUICKEN POINTERS
By: Kerry M. Kerstetter, CPA
Publisher of the Kerstetter Letter
Having
used Quicken for my own personal bookkeeping since 1988, as well as working
with several clients using Quicken, I have noticed many people not using some
of its more useful features. Using
these features allows a much more complete accounting for income and expenses
and will save income taxes, speed up the tax return preparation process, and
allow for much more useful information for decision making during the year.
While
I am discussing Quicken specifically, most of the points also apply to Intuit’s
other program, QuickBooks and to Microsoft Money. QuickBooks is much more complicated to use than is Quicken,
requiring all activity to be run through accounts receivable and payable
accounts. Unless you have a good
understanding of debits and credits and classic double entry accounting, you
will find that Quicken is much easier to work with.
This set of tips is not endorsed by Intuit, the maker of Quicken. I have no financial interest in Quicken as either a stockholder nor as a retailer of the program. It is also not intended as an exclusive list of tips, nor as an example of the only way things should be done. However, if you, or whoever does your bookkeeping, were to incorporate these ideas into your procedures, you will be more than satisfied. Some of these tips will address accounting and tax related matters that are not specific to Quicken.
I
should also mention that my experience with Quicken has been completely on DOS
and Windows systems. My understanding
is that Mac versions have similar features.
I intend for this guide to be an evolving document. If you find any of the material to be overly
confusing or if you have any other comments, please let me know.
It is very important to use a separate Quicken file for each tax return (i.e. 1120, 1065 or 1040). Multiple businesses on the same tax return, such as more than one Schedule C, E or F, should be in the same file, but with different classes designated for each. It is very easy to switch between files with the “Open” command. In fact, it saves a lot of time if you add the “Open” icon to your icon bar. This helps prevent any IRS accusations of commingling and allows a better picture of each tax return. Since C corporations are allowed to have a fiscal year ending at a different time than the December 31 year end which is required for individual, partnership & S corporation returns, combining them in one Quicken file makes a real mess. When you set up your Quicken file, the program does assume that your year ends on December 31. If it doesn’t, make sure you set up the proper fiscal year end in the “Settings” section of the “Options” selection under “Edit.” This will speed up the production of reports for the current or past year.
There
is no such thing as a “one size fits all” chart of accounts. The most efficient way to get started is to
just accept the standard home and business categories that come with Quicken. You can delete the ones that you’ll probably
never be using, such as “Canadian Pensions.”
Whenever
you have an expenditure that doesn’t fit properly into one of the already
established categories, set up a new one.
You will have much more useful information if you have more detailed
categories. It is also true that the
more detailed information you report on your tax return, the less likely you
are to be selected for an audit by the IRS.
There is no maximum number of income or expense categories that you can
report on a paper tax return. Combining
too many items under one heading, such as “Office Expense” gives the appearance
of less accurate books, as well as generates much larger numbers. IRS screeners focus on the larger dollar
amounts when deciding which tax returns to audit. Likewise, do not use suspicious or overly generic sounding
category names. Miscellaneous, Other, Business
Expenses and Sundry are magnets for suspicious
auditors.
Using
sub-accounts is a good way to break out each kind of expense, and also have a
subtotal for the main category. Many
real estate brokers set up a sub-account for each of their agents to whom they
pay commissions.
While
most of the newer versions of Quicken have a fairly simple built in function
for closing out a past fiscal year, I don’t think most people need to do
that. When you close out the past year,
it sets up a separate file for the activity through the past year-end and a new
one beginning from the start of the current fiscal year. Quicken has a very powerful and simple to
use reporting capability that allows super fast customization of dates to
cover. There are times when you will
need to run reports that cross over fiscal year boundaries. For example, I often advise setting up
corporations on fiscal years different than the calendar year that individuals
are required to use. For the
corporation’s income tax return, the normal fiscal year profit & loss
statement will do the job. However, for
payroll reports (W-2s & 1099s), the calendar year is the only acceptable
time period to use. Leaving your
Quicken file open to cover many years will allow very rapid production of
almost any conceivable reports you may want to make. Quicken also has the capability to produce comparative reports,
showing the activity for the current year side by side with the same period in
the previous fiscal year. It will give
dollar and percentage changes. If you
were to close out the prior year, no such report would be possible.
I
have several different companies set up on my Quicken. Until a few years ago, the only one which I
used to close out each year and start new files was my personal file. The only reason I did that was that I have
so many transactions that by November or December each year, the backup will no
longer fit on one floppy disk. By
starting a new file for the new year, I was then able to do the entire backup
on one disk again, at least for nine or ten months. For all of the other companies, I have several years included in
each file. I have found it very useful
to have these extra years in the same file for doing multiple year reports.
Rather
than use a lot of sub-accounts, it is much more efficient to set up a class for
each different business venture. After
you enter a category for each item of income and expense, hit the slash key (/)
to access the list of classes. You can
then run profit & loss reports with each column a different class. These are like departments or divisions. Within your personal Quicken file, you
should set up a Class for each tax schedule, as well as one for purely personal
things. For example, one for each sole
proprietorship or farm activity (Schedules C & F), one for each of your
rental properties (Sch. E) and so on.
When you enter a category for your income and expenses, hit the
backslash (/) key and the class list will pop up. To make sure everything has been assigned a class, run a
customized P&L with each column a separate class. Anything that has not been coded with a class will show up in the
“Other” column. This is probably the
most powerful, yet most underused feature of Quicken that can make your tax
preparation work so much easier.
CREDIT CARDS & LOANS
Many
people post all of their credit card payments to one big expense category,
“Credit Card Payments.” That is
improper in regard to both categorization and timing. There are two ways to account for credit card payments. The quick and dirty way is to split each
payment up between the different categories of expenses included on that
bill. This only works for
categorization when you pay off the credit card in full each month, but is
still wrong for timing because IRS allows deductions to be claimed as of the
date a credit card charge was incurred, not as of the payment date.
The
proper way to account for credit card activity is to set each one up as its own
credit card account on your balance sheet.
Each time you make a charge, you enter that into that card’s account
register, properly categorizing it as of the date of the charge. When you receive your credit card statement,
use the built in reconcile feature to balance out the card’s activity, pick up
any finance charges and schedule a payment.
When the check is written, it is charged against the credit card account
on the balance sheet. A reminder of the
often overlooked interest tracing rule.
Contrary to popular belief that credit card interest is nondeductible
personal interest, any finance charges follow the path of the charges. If the charges were for business expenses on
your Schedule C, any related finance charges should be deducted on that same
schedule. Use the Class function to see
that it goes to the proper schedule.
One
of the most commonly overlooked sources for deductions is payments made in
cash, where there is no cancelled check or credit card statement. Capturing this information is the tricky
part. You need to get in the habit of
writing down the cash expenditures in something like your planner or
calendar. When you next work on
Quicken, you can enter it into your computer.
How
the transactions should be shown on your Quicken is another often mishandled
area of bookkeeping. An asset account
should be set up for Cash on hand. When
you obtain cash by cashing a check or using an ATM, you should make an entry in
that bank account, but instead of charging it to an expense a category, code it
to the Cash account. Technically, such
a transaction is really just a transfer from money in your bank account to
money you have in cash. Now, to post
the use of that money, you need to open the register for the Cash account and
post the payments just as you post checks and credit card charges, with
appropriate categories and classes.
Likewise, if you receive any income in the form of cash that is not
deposited into a bank, you should enter it into the Cash account register, with
the appropriate income category and class.
One aspect of effective cash management is paying your bills as late as possible before incurring any late fees or additional finance charges. Before I started using Quicken, I used to pile up all of my mail received during tax season and not get to it until after April 15. It cost me a considerable amount in late charges and did complicate things later when I applied for loans. (Side note: These normally fatal black marks on credit report are explainable. When I pointed out the timing of the late payments, during tax season, as well as promised not to do it again now that I had Quicken, the lenders agreed to overlook this problem.)
Whether
you use Quicken to print your checks or just enter the information after the
fact, you can still schedule payments to be made on the computer. After you write the check, just enter the
check number in the “Num” column in place of “Print.” Everything else has already been entered.
Quicken
comes pre-configured with most of the normal financial statements. However, it is very easy to specially
configure the reporting function to give much more useful information. Year-end reports sorted by payees are
extremely useful for 1099 preparation.
I normally include a copy of each person’s Quicken listing of payments
with the 1099s I send out. A profit and
loss with each column a different class is the best tool for tax return
preparation. Once you have the report
configured as you like it, memorize that report by hitting “Control-M”. Make sure to give it a name that you will
recognize because it might be a year before you use it again.
Entries
into accounts can be modified after the fact to enable the preparation of some
very useful reports. For example,
Sherry’s Tax Free Exchange Corporation holds millions of dollars in trust for
clients to reinvest. I wanted to use
Quicken to keep track of each client’s funds balance without having to keep
separate records. Quicken doesn’t allow
a report of an account’s activity to be sorted by the memo field, which is
where I include the client’s name for checks written and wires sent. I found that I could go into the liability
account I have set up for client trust funds and reverse the memo and payee
entries (using Windows cut & paste) so that the client’s name was in all of
the payee fields for all of the activity related to him. I configured (and memorized) a report to
list all of the activity in the Client Trust Funds sorted and subtotaled by
Payee. It allows me a perfect
reconciliation of exactly how much money we are holding for each client.
This
is a lesson I have had to learn the hard ways.
Anyone who has used a computer for more than a few months knows that it
is not a matter of if your hard disk will crash or your data file will
become unusable, but a matter of when.
I have used several different tape and optical disk backup systems for
my hard drives. None of them have been
100% reliable in terms of restoring Quicken data files. You can configure the program to remind you
to back up the file. For the past few
years, I have developed a habit of popping the backup floppy disk into the computer
at any time I work on a Quicken file.
Before exiting the program or switching to another company, I always
force a backup. In fact, I added a
backup icon to my icon bar in order to make the backup process even faster.
This
will save you so much time, you’ll kick yourself for not doing it earlier. I know because that’s exactly how I felt
after I set up my checks on Quicken. I
waited until after April 15 and it ended up only taking me about an hour. Considering that I write over 100 checks per
month, most of which are to the same parties, the time savings have been
stupendous. Over the past several
upgrades to the Quicken program, the automatic memorization capabilities have
become so powerful that it is almost like magic. I have only used this with laser and ink-jet printers. It is possible to print checks on pin-feed
dot matrix printers, but the task of aligning the checks and print heads always
seemed to be a bit of a hassle. Prices
for printers have dropped so much in the past year that most people are now
using a sheet feed printer, such as a laser or ink-jet.
While
you can buy preprinted check stock from Intuit or most other business supply
sources, such as McBee, I recently started printing my own checks from blank
check stock. Most banks no longer use
magnetic character readers for check processing; so normal laser printer toner
is fine for checks. The benefit of this
is that you can print up checks in smaller batches than the 500-1,000 you
normal have to order of the preprinted variety. This saves the waste of having to toss out hundreds of unused
checks when an account is closed out or your bank is swallowed up by another
one. With banks changing names on
almost an annual basis, it also allows you to update your checks much more
conveniently. The program I use is
called VersaCheck, which actually operates through my word processing program to set up and print the checks. Other similar programs are on the market.
A common mistake I see is when people post expense reimbursements (such as rebates on software purchases or reimbursements received from joint office occupants) as income. This distorts the true income generated by the business and could end up costing you money because many organizations and jurisdictions base their charges or business license fees on the gross revenues. In technical terms, these are “contra expenses,” which should be categorized either against the exact same expense categories as the original expenditures or at least put them in a category that is set up as an expense and not an income item.
Another big mistake that could be potentially very expensive tax-wise is how people are recording their loan activity and transfers between accounts. When you move money between bank accounts, that is a nontaxable event which should not show up at all on your income statement. Money borrowed or paid on loan principal also has no business showing up in your income statement. You can make the Quicken entry from the register for either of the accounts that is involved. Just don’t repeat it again in the other account’s register. By all means, do not set up expense categories for Loan Payments or Transfers, which I often see done.
You
should try to pay your purely personal expenses from your personal bank
account. When money has to be loaned
from you to the company, or vice versa, it should be run through a liability
account called “Shareholder Loan.”
While
the term “Dividends” is fine for payments taken from an S-corporation, it
doesn’t work as well with a C corporation.
Money taken out as dividends is taxed twice, something we definitely
want to avoid. Money should be taken
out as either consulting income to yourselves, lease payments for your home
office and equipment, royalties for the use of the business name & style,
and/or as loans.
This
is a commonly mishandled item for owners of rental property. If these are truly refundable to the
tenants, and not just prepayments of rent, they need to be set up as their own
liability accounts on your balance sheet.
IRS does not require you to report true security deposits as rent
income. However, anything that you have
designated as “Last Month’s Rent” is required to be reported as rent income in
the year received, even though the actual last month may be several years down
the road. Setting these up in their own
liability account also makes it easy to track security deposits held in case of
a sale or a dispute with a tenant. If a
tenant does leave and forfeit his deposit, you need to make an entry reducing
the security deposit account with an offsetting increase in the “Rent Income”
or “Forfeited Deposits” category.
As
are many software companies, Intuit is utilizing the Internet more to
strengthen its programs’ capabilities.
Some of these powerful features I have used, while others I haven’t had
a need for yet. If anyone has some
experiences with these features, pro or con, I would be glad to incorporate
those comments in a future update to this Quicken tips sheet.
As new upgrades are released for the program, they are available from Intuit’s web site. It’s practically automatic if you access it from the Quicken program. It will also update the values of any securities that you specify.
I did use Quicken’s floppy disk credit card statement for about a year, until I decided it wasn’t worth the extra monthly charge to me. It did speed up entering the transactions I hadn’t already entered. The new online account allows you to access your credit card activity via the Internet. I recently started using it for my Regions Bank Visa account, and it seems to be working fine.
This
is something that is starting to become available around the country. Some banks use their own proprietary access
software, while many are partnering with Intuit to make transactions flow
smoothly between Quicken and the bank.
I have just started using it with Regions Bank and have been very
impressed with how well it works.
Reconciling my bank account at any point in time (not just at the end of
a statement period) is even much easier than ever with the cleared transactions
updated automatically. Regions is charging
$9.95 per month for Quicken service for individuals and $19.95 per month for
the same service with QuickBooks for corporations. Other banks may have slightly different fee schedules.
I
have also recently started using Regions’ online service to have it make
payments of some of my credit card bills.
The lead time for these payments seems to be a bit longer than should be
the case for electronic payments. I
will know more about how well this is working in another month or so.
There is a feature in the newer versions that will allow your investment portfolio to be updated to current market values by dialing in to Quicken’s data base. For anyone who has these kinds of investments, this could be very useful for analyzing your current financial status most efficiently. Since my investments are still strictly in real estate and animals, it doesn’t work well for me.
MBA~CPA~ATA~ATP
E-Mail:
KMKCPA@TaxGuru.org
WebSite:
www.TaxGuru.org
Snail-Mail:
11802 Deer Road, Harrison, AR
72601-6550