Tax
IN THIS LESSON
Stay compliant with new Beneficial Ownership Information requirements, payroll tax obligations, and multi-state sales tax rules.
Every module is created to help you focus on what matters most to you. It’s not just about gaining knowledge—it’s about moving forward with purpose.
The key learning points in this video section focus on applying double-entry accounting principles to common business transactions, particularly emphasizing the concepts of debits and credits, assets, liabilities, and how transactions affect financial statements and taxation:
Understanding Debits and Credits
A debit or credit is synonymous with increasing or decreasing an account, not necessarily designating it as an asset or liability account.
The purpose of tracking transactions (debits and credits) is to understand how to read financial statements and analyze trends. If an account is recorded incorrectly, the trend analysis will be wrong.
Accounting for Inventory and Cost of Goods Sold (COGS)
Items purchased to directly make or produce inventory (like cake boxes for a cake business) can be considered part of the Cost of Goods Sold (COGS).
When inventory is purchased with cash, the inventory asset increases (debit), and the cash asset decreases (credit).
When inventory is sold, the corresponding COGS must be recorded.
The COGS reduces the sales revenue to determine the profit, which is the amount on which the business is taxed. For example, if $20,000 worth of cake is sold but the cost to produce it (COGS) was $15,000, the net profit taxed is $5,000.
Accounting for Expenses and Liabilities (Credit Cards)
Utilities are an example of an expense. An expense is increased with a debit.
If an expense (like utilities) is paid with a credit card, the credit card balance (a liability) increases, which is recorded as a credit.
To pay off a credit card balance with cash, the cash asset decreases (credit), and the credit card liability decreases (debit).
Taxation of Rewards and Bartering Systems
Rewards earned from a business credit card (such as $5 on a $200 expense) are considered income to the business because the IRS includes everything earned as income unless stated otherwise.
Bartering systems, like trading services (hair for another skill), can also be considered revenue because they create value that otherwise would have required payment.
Income is not necessarily the receipt of money.
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