published October, 2007
This last month, I was asked who Enrolled Agents are, and since I’m one of them, I thought I should respond in general, since it might not be clear to everyone.
An Enrolled Agent (EA) is an individual who has demonstrated technical competence in the field of taxation both by exam (I passed in 1999) and through continuing education. I’m presenting a class on November 3rd (see below) for Enrolled Agents and other tax preparers—I get credit for putting the seminar on, and they get credit for participating.
Enrolled Agents are individuals licensed by the federal government. They can represent taxpayers before all administrative levels of the Internal Revenue Service, but we can’t represent you in tax court (that requires an additional certification, and things hardly ever get that far).
You’ve heard the adage “a lawyer who represents himself has a fool for a client”? This typically applies to tax audits as well. An Enrolled Agent isn’t personally involved and can often provide better representation than you can yourself under the stress of an audit.
Enrolled Agents specialize in taxation. Throughout the year they advise, represent, and prepare returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. I personally refer out estates and trusts since I specialize in small business tax, and I have yet to prepare a city’s tax return, even though some of them are incorporated.
What’s the difference between Enrolled Agents and CPA’s? Only Enrolled Agents are required to demonstrate competence in matters of taxation before they may represent a taxpayer. They are the only representatives for taxpayers who receive that right from the U. S. government. Plus, we smell nice. CPA’s please see the disclaimer at the bottom of this newsletter. An analogy I like is: if you need surgery you want a surgeon—you wouldn’t want an internist. Enrolled Agents are specialists in tax, although some of us do other things as well.
My work includes advising businesses on things like entity selection, selling your business, and QuickBooks setup, plus the educational seminars and products we offer in addition to the normal tax preparation for small businesses and their owners.
published October, 2007
I got a question about the “equity section” of the balance sheet and what goes there.
The section is divided up into different accounts. Exactly what name things are called depends on the particular type of company, but there are several items that are common to all companies.
The Equity section is a way to calculate the “book value” of the company as a whole. An accounting convention is A=L+OE, which means Total Assets of a company (all the cash, receivables, fixed assets and property) is equal to the Liabilities plus Owners Equity.
In theory, if you converted all the assets of the company to cash and paid off all the liabilities, the owners get to keep what ever is ‘left over.’ That is their Equity in the company.
It is possible to have more liabilities than assets, so the owners actually owe more money than the company has in assets. If the owners are personally liable for what the company owes, they’d have to pay to go “out of business.” That’s generally a bad thing. Companies with negative Equity can stay in business if they have good Cash Flow that allows them to service their debt long enough to become profitable. Negative Equity and bad cash flow leads to bankruptcy.
Corporations have an account called “Stock” or “Capital Stock” (same thing). This represents money the corporation has on “permanent loan” from the stockholders. This amount is set at the beginning of a corporation, and is the initial deposit made to open the checking account, plus the value of any assets contributed. This number rarely changes over the life of the corporation. Service businesses typically have smaller amounts than capital intensive businesses like computer rental companies where you’d expect a certain amount of cash to purchase equipment. I often set this account up when I prepare the first year’s tax return, if it isn’t already set up. If you’re not a corporation, you probably don’t have this account.
There is a “Net Income” account that tracks the current year income. This number should exactly match the Net Income at the bottom of the Profit and Loss statement for the year to date. This account is typical to all businesses. This is only current year income; no prior year income should be included here.
The first year, there is no “Retained Earnings” account, because this account tracks the Net Income for every year previous to the current year. (Remember the current year is all in Net Income). In the second year the Net Income moves to the Retained Earnings account: you ‘zero’ the Net Income and start Net Income over again.
Both Net Income and Retained Earnings may be either positive or negative numbers. In a typical startup, these numbers are negative the first few years until income starts to accumulate. If these numbers are negative, there should be a good reason, or you should quit.
“Distribution/Draw/Dividends Paid Out” is an account that usually carries a ‘negative’ balance. The official name depends on the form of your business, but this account is where you keep track of money taken out of the business by the owner(s). This is different from payroll, if the owners have payroll (like in a corporation). Payroll is always an expense.
There can be some other wacky accounts in the Equity section, like Treasury Stock and Paid In Capital, but you probably won’t need these in a typical set of books.
If you have questions about your Equity Section, give us a call.