Home Office, Self-Employment Tax, and Filing Strategy

The learning points or topics covered in this portion of the video include:

• Revenue Recognition and Deferred Revenue

• The accounting regulation for revenue recognition, "Revenue Recognition 606," states that you cannot record something as revenue until you have earned it.

• If a business receives money in advance for a membership or service that has not yet been used, the money is recorded as a liability, not as revenue.

• This liability is called deferred revenue because it will be recognized as revenue in the future when it is earned, not today.

• For example, if a membership is $100 and a customer pays the full amount, the business records a $100 debit to cash and a $100 credit to deferred revenue (a liability).

• When the service is used (e.g., $50 worth), the business recognizes $50 as revenue and decreases the deferred revenue liability by $50.

• In contrast, under cash accounting, the entire $100 would be automatically recognized as revenue when received.

• Accrual accounting is beneficial for a loan officer because it allows them to see future income that has not yet hit the bank account.

• The Balance Sheet

• The balance sheet is one of the key financial statements discussed.

• It is divided into three sections: assets, liabilities, and equity.

• The accounting equation is that assets must always equal liabilities plus equity.

• Assets are things that will make the business more money.

• Equipment (like a computer) is an asset because it is used to make money.

• Accounts receivable only happens in accrual accounting and represents services provided to someone who hasn't paid yet.

• A prepaid asset is an asset that has been paid for in advance but not yet used, such as paying a full year of insurance at the beginning of the year. This is recognized as an expense over time as it is used.

• Other assets include cash and cash equivalents (easily convertible into cash in a short period of time, usually less than a year), short-term investments (like T-bills or CDs), inventory (which converts into cash or revenue when sold), non-current investments (future benefit, like long-term stocks), property, plant, and equipment (fixed or capital assets), and intangible assets (non-physical items with value, such as goodwill or brand recognition).

• Liabilities are what the business owes.

• Examples discussed are a credit card balance, payroll-related liabilities (such as income tax liability and 941 liabilities for federal payroll taxes), and SUDA (State Unemployment that is owed).

• Other liabilities include accounts payable (something used up but not yet paid for, like a credit card), accrued expenses (liabilities incurred but not yet paid, like payroll taxes), and long-term debt (like a 30-year mortgage).

• Equity is the difference between assets and liabilities.

• The equity equation is Assets minus Liabilities equals Equity.

• Shareholders' equity accounts vary depending on the business structure (LLC, C Corp, S Corp) and include things like capital (what an owner invests in the business).

• Balance Sheet vs. Profit and Loss Statement

• The balance sheet is considered a permanent account because the account numbers roll over year after year.

• The profit and loss statement (P&L) accounts are considered temporary accounts because they close out to equity at the end of the fiscal or annual year.

• The net income from the P&L will always show up on the balance sheet. If these two numbers do not tie, it means either the reporting periods are different or there is an accounting error.