As a business owner, you want to keep an eye on your finances, including your expenses. When you process any transaction, it needs to be recorded in the books. For that reason, you need to know the difference between liabilities and assets. Here is a complete breakdown of these terms and what they mean for your small business.

The Difference Between Assets and Liabilities

Before you can know the differences, you need to understand these terms’ meanings. Liabilities are existing debts that a business owes to a vendor, organization, employee, lender, another business, or government agency. Many of these liabilities will help the business owner finance their company, such as a loan. On the other hand, assets are the resources or sums of value that a business owns. These assets can provide long-term benefits to the owner and also help to generate revenue.

You must list all liabilities and assets on a balance sheet, which is a vital financial document for any business.

What Is a Balance Sheet?

The balance sheet is one of the three fundamental financial statements for a business, along with a cash flow statement and income statement. The balance sheet lists the business’s total assets and how those assets are financed. Balance sheets could be called a statement of financial position or net worth.

The balance sheet will be divided into two sections. All the company’s assets remain on the left side. A list of the liabilities and equity stays on the right. The liabilities and assets are separated into two categories: current and noncurrent. Liquid accounts, such as cash and inventory, are considered part of the current category. Property, equipment, and long-term debt will end up in the noncurrent categories.

Liabilities Examples

Liabilities are either long- or short-term. As previously mentioned, short-term liabilities are current liabilities, and those long-term ones are considered noncurrent. Current liabilities often include credit card balances, accrued expenses, unpaid invoices, and payroll taxes. Noncurrent liabilities are leases, deferred tax payments, and mortgage loans. You must pay those short-term liabilities within one year of incurring the debt. Long-term liabilities are often paid over several years.

Examples of Assets

Similar to liabilities, businesses can also have noncurrent and current assets. A current asset is known as a short-term one, while noncurrent assets are long-term. Current assets include investments, accounts receivable, cash, and inventory. Those noncurrent assets include equipment, trademarks, and patents. All of these items provide continual, long-term value to the businesses. However, you cannot convert noncurrent assets into cash within a year. Additionally, these long-term assets tend to depreciate over a period of time.

Along with that, assets are intangible or tangible. Intangible assets are non-physical items you cannot convert to cash, including trademarks, business licenses, logos, and patents. Tangible assets are physical items that you can easily convert to cash. These assets include bonds, equipment, and inventory.

Assets, Liabilities, and Equity

Once you figure out what you owe compared to what you own, you will want to know how much value is left over. That term is known as equity. You can figure that out by totaling your assets and subtracting those liabilities. For small business owners, your equity is the business’s net worth. If you have a partnership or sole proprietorship, the equity is often called the “owners equity” on the balance sheet. In a corporation, this equity is referred to as “shareholders’ equity.”

No matter the name, equity is vital to your company’s relationship between liabilities and assets. On the balance sheet, the assets equal the total returns plus the total equity. There are several accounting equations to use to determine these figures, such as:

• Equity = Assets – Liabilities
• Assets = Liabilities + Equity
• Liabilities = Assets – Equity

With those equations, your small business accounting services can determine if the business finances through debt or uses its own funds to operate the company. However, these equations will only work for those who use the double-entry bookkeeping methods for their books.

Equity can affect both sides of these equations. If the business only has figures for equity and assets, it can easily calculate liabilities with no issues. Remember that bookkeeping and accounting can be tricky for any business owner. For that reason, hiring a professional to help calculate your assets, liabilities, and equity may be a good idea.

Do These Calculations Matter?

Liabilities, assets, and equity are essential for your business accounting system. With these numbers, you know how much you own, how much you have, and what is left over for your business. You will know where your money is at any given point in your business. These numbers ensure you do not make mistakes in recording those transactions.

Balancing liabilities, assets, and equity is the foundation of double-entry bookkeeping. Without knowing these calculations, you will not be able to understand your business’s finances. As a result, you could have a strong cash flow, but you may have an outstanding debt that eats away at your profits. With a better understanding of these terms, you can confidently know the financial health of your business.

At TMD Accounting, we help you track your assets, liabilities, and equity. Our experienced team can assist with your small business’s accounting, bookkeeping, and tax matters. We are a family-owned and -operated business that has been serving the Gloucester County area for over 40 years. You can count on us when you need an accountant for my small business. Schedule an appointment by calling 1-856-228-2205.

Law firms have unique financial needs that must be addressed differently than how other types of businesses handle their finances. A law firm’s need for specialized accounting applies to both the firm’s business and accounting strategies and how they track and manage various types of accounts. Because of the requirements law firms have, they can benefit from working with accounting firms that offer small business accounting services to attorneys. TMD Accounting provides accounting services that focus on the unique accounting needs of law firms and can help your firm stay on track.

Help With Income Forecasting

Most law firms use billable hours to determine how much to charge clients. Many attorneys charge for their time in six- or 10-minute increments. Tracking billable hours can be a headache for many attorneys. To ensure that your firm is accurately determining its billing, we can help you transition to tools in the cloud to track your lawyers’ hours. Using the cloud can help you to accurately and efficiently track billable hours for every client while reducing or eliminating time losses. Many small- and mid-sized law firms contend with income fluctuations, which make managing your firm’s cash flow important to your success. Our accountants help law firms to manage accounts payable, create forecasts, and reduce the time involved with receiving payments for accounts receivable.

Optimizing Taxes

Employment agreements with attorneys can be structured by law firms in different ways. Some firms pay attorneys as independent contractors. Others hire lawyers as full-time, salaried employees. Some agreements might include profit-sharing or bonuses. What might work for your firm will depend on several factors. An accounting firm that specializes in providing services to law firms can help you choose the structure that works the best for your business.

In addition to your employment agreements, you also need to ensure that you have the right business structure. The business structure you choose for your law firm can affect the taxes you might pay. We can help you choose the structure that will provide you with the most tax advantages.

Tracking Trust Funds

Law firms must keep their clients’ funds in separate trust accounts and cannot commingle them with their other money. Many firms ask for retainers upfront before they begin work. Firms must follow strict rules when they hold client funds in a trust account for recordkeeping and client notification. It is critical for you to avoid commingling the funds with your firm’s money or using one client’s money to pay for services you provide to another client. If you mismanage your trust accounts, deposit funds in the wrong account, or fail to meet your recordkeeping and reporting requirements, you could face significant penalties, including the possible suspension of your law license. A specialized accountant can help to track client funds to ensure you avoid these types of mistakes.

Matter Cost Tracking

Law firms have both direct and indirect costs. You must correctly identify which costs are direct and indirect. The accounting for direct and indirect costs must be handled differently. Our accountants can help to identify which costs are direct or indirect and account for them properly.

How to Choose the Right Accounting Firm

Choosing the right accounting firm to handle your law firm’s accounting needs is important. Here are some tips to find the right legal accountant for your firm.

1. Ask About the Company’s Experience

While finding an experienced accountant is important, you want to find an accounting firm that has significant experience working with legal clients. Ask a prospective accounting firm about its experience working with law firms.

2. Ask About the Services Provided by the Firm

You will want to know about all of the services the accounting firm offers to law firms and their levels. For example, you will need to determine the degree of control you want to give the accounting firm over your bookkeeping. If you want comprehensive accounting services, you will want to look for a full-service firm. Some firms have bookkeepers to handle daily transactions. Others might charge more if you need to hire a certified public accountant to handle regular bookkeeping tasks.

3. Ask About Audit Support

It is a good idea for you to find an accounting firm that offers help in case your law firm is audited by the state or the Internal Revenue Service. The state licensing body can audit law firms to ensure they are accurately tracking and handling client funds, and the IRS audit can happen to anyone. Undergoing an audit can be stressful. If you have a trusted accountant’s help during an audit, it can greatly reduce your stress because you can feel confident in the accuracy of your financial data.

4. Ask About Fees

Accounting firms have different payment structures. Some charge flat fees for each task performed while others charge by the minute. You will want to understand your accountant’s fee structure so that you will know whether your accountant’s bill will increase each time you make a phone call or whether it will be calculated by task.

5. Ask for References

It is a good idea to ask other law firms about their experiences working with the accounting firm you are considering. Word-of-mouth referrals can help you determine which firms are known to provide good specialized services to law firms. You can also ask the firm you are considering to provide you with references from law firms that have used or currently use their services. Follow up with any references you are provided to ask about their experiences.

Talk to an Accountant for My Small Business

As an attorney, it is critical for you to carefully track your firm’s and your clients’ money. Working with an experienced accountant at TMD Accounting can help to ensure you meet your regulatory requirements and grow your practice. Contact us today for a consultation by calling 1-856-228-2205.

As a small business owner, you likely understand the importance of working with an accountant who understands your business and works to help you meet your goals. If your current accountant is not the right fit, you might wonder about how to go about switching to a new accounting firm. At TMD Accounting, we have provided small business accounting services to many companies over the past four decades. When we meet with new clients, many express they were frustrated with their former accountants because of poor communication. We always maintain strong communication with our clients to ensure they understand their finances and where they are at. Here is some information about steps you can take to change accountants with minimal disruption to your business’s operations.

1. Know Why You Want to Change Accountants

If you feel dissatisfied with your current accountant but are hesitant about switching, think about the reasons why you are considering a change. Business owners choose to change accountants for many reasons, including poor performance, lack of communication, or failure to provide good advice. Some businesses hesitate to change accountants because of fear. However, it doesn’t have to be difficult to switch to a new accounting firm. Small issues you are currently experiencing with your accountant can grow if you put off changing to a new firm. Understand why you want to switch and move forward with the process. You will likely feel relieved once you do so.

2. Find a New Accountant

Once you understand your reasons for wanting to change accountants, you will want to find a new firm before you end your relationship with your old one. Some of the characteristics you should look for in a new accounting firm include good communication skills, experience in your industry, the right credentials, excellent reviews, and the right types of services for your business.

A good accountant should allow you to contact them as often as you need without charging extra. Quality accountants understand that allowing their clients to ask questions means that they will not have to fix as many things later. Other firms charge clients by the minute for asking questions. Schedule a consultation with a prospective firm to help you determine whether the accountant is a good match for you.

You will also want to find an accountant who has experience working with companies in your industry. This helps you to ensure your regulatory compliance. Working with an accountant who understands your business and your industry also helps them to provide strong business advice.

The firm you choose should also have the right credentials. Look for a firm with accountants who are certified public accountants or enrolled agents. Ask the firm about the continuing education their accountants attend and what they do to remain current with changes in the tax laws.

Looking at reviews of a prospective accountant is also a good idea. However, make sure the reviews you read are authentic by checking whether they are provided by people with real profiles, are specific, and are posted over time instead of bulk reviews that suddenly appear all at once.

Finally, make sure the accounting firm you are considering offers all of the types of accounting services your business needs. If you are outsourcing multiple services, choosing a firm that offers all of them can help to simplify how many companies you have to regularly contact.

3. Notify Your Current Firm

It might be difficult for you to notify your current firm that you are moving on. While it might seem awkward, you still need to have the conversation. Your new accounting firm might assist with the process by helping you choose the service end date with your current firm, settling unpaid bills, and facilitating the exchange of records. Some businesses avoid this step because of its awkwardness, but you must notify your current firm of your planned move to ensure your records are transferred smoothly without any problems for your business.

4. Set Expectations With your New Firm

When you first start working with your new firm, you should make certain your accountant understands your reasons for switching to them and the expectations and goals you have for your business and your partnership. Establishing your goals and expectations at the outset can help to ensure that both you and your accountant will be able to focus on growth opportunities and stability for your company. You should expect to have meetings with your accountant to make sure that you are set up to succeed. Your accountant will want to understand your business completely to help you create a goal plan and establish best practices.

Find an Accountant for My Small Business

While realizing that you need to change accountants might feel intimidating, you should trust your instincts and move forward. Working with an accounting firm that is a better match for your business can make a world of difference in your business’s success and growth. It is not as difficult as you might think to change accounting firms. When you approach the process professionally, it can be fairly smooth. TMD Accounting provides a full menu of services for businesses in numerous industries and can help you determine whether we might be the right fit for you. To learn more about the benefits of switching from your current firm to us, contact us to schedule a consultation at (856) 228-2205.