Do you struggle with filing your taxes? Feel like you need a course in small business accounting?
Stop right there! Don’t go jumping into doing your own accounts until you’ve read this.
I could literally just list one step here and call it a day. That first (and last) step would: hire an accountant. That’s one of the most important things you can do for your video production company accounting.
Still, it’s important to have a working knowledge of your business’ accounting whether you hire an accountant or not. So I’m not just going to write one step and be done with it!
This is going to be a detailed article about everything you need to know about business accounting and how to get it right. I’ll endeavor to make this as non-boring as possible. Reading about accounting tends to be quite dry, so let’s jazz this up a bit!
Small Business Accounting Tips: The 7 Steps to Flawless Video Production Company Accounting
Regardless of where you get your numbers, the coming years show healthy projections right across the board. The forecast for film box office revenue is staggering and is expected to increase from roughly 38 billion dollars in 2016 to almost 50 billion by the year 2020.
China and India lead the pack when it comes to ticket sales, but the U.S. grabs the title of the world’s third largest film market.
To put this into perspective, in 2016 there were almost 1.2 billion tickets sold across the U.S. These numbers are enormous, especially considering that only a relatively low 14% visit a theatre monthly, 31% go a couple of times per month, and 6% visit only once annually.
Video production will only see its star continue to rise!
The basic principles of accounting do not change. What does change, however, is how these principles need to be adapted to fit seamlessly into different industries. One of the most difficult industries for accounting is video production, just due to the enormity of what is involved.
There is so much more to consider than just simple profit and loss statements. Pre-production, post-production, tax breaks, wages, equipment purchases, and the list goes on.
It takes a little more than a passing grade in senior year accounting! For obvious reasons, and as I mentioned at the beginning, the majority of the time it makes the most sense to hire an accounting firm.
This will take all of the worries off your back and put them where they are most qualified. For others who really wish to key their fingers on the pulse of the entire process, they may look at doing the books as a requisite part of owning a video production company.
While most of us are capable of doing some basic accounting if push came to shove, there are certain industries that require a completely new knowledge base.
This does not mean that you can’t do it yourself, but rather that you better get your thinking cap on.
To make it as easy as possible for you, follow along below for 7 steps to flawless video production accounting.
One of the very first things you are going to want to do is invest in a proper office. We are talking a desk, filing cabinets, a computer, files, and labels galore.
Nothing is thrown out in accounting and it is essential that you know exactly where to find everything.
Since this is big business, make photocopies of each piece of paper (no matter how small) and back up all your back ups! One lost piece of paper can result in a loss of deductions potentially in the millions of dollars.
Revenue vs. Gross Profit
One of the key distinctions to make when tackling any kind of accounting is to understand and recognize the difference between revenue and gross profit.
In the simplest terms, revenue is all the money that a company makes within a set amount of time. Gross profit is all the money a company makes within a set, minus the expenses.
Revenue, sometimes called Total Revenue, is everything that your video company makes from selling your services. You use gross profit as a more exact measurement of what you’re making once all expenses (like advertising, outsourscing, etc) have been taken off the total revenue.
So, as you can see, for video production company accounting, it’s important to know your numbers.If you get it wrong, you could be in for a world of hurt. Knowing the difference between Revenue and Gross Profit can literally save your company!
Writing and Understanding Financial Statements
There are five main components to a full set of financial statements. We will go through each of them individually. I’ll try not to make it too corporate and boring, like these things often are!
Statement of Comprehensive Income
Also known as the profit and loss statement, the income statement is where the meat of the matter lays. Did you make a profit or do you have losses?
A period of time is defined within which the company’s operations results are put on paper. In a video production company, it’s no different, the defined period is most often considered a year, right from start to finish.
A statement of comprehensive income includes other income earned during the period (unrealized gains, translation adjustments, revaluation surplus etc.) along with the net income or loss from the results of operations.
Statement of Changes in Capital
This can sometimes also be called the statement of changes in equity. You know exactly how much your capital account was at the beginning of the period.
What you will be keeping track of religiously are any changes to that capital amount. Contributions from project investors will increase your capital, while expenses, salaries, and owner withdrawals cause a decrease in the capital account.
This report is titled differently depending on what business ownership type you have. Corporations call it the statement of stockholders’ equity, partnerships use the heading statement of partners’ equity, and sole proprietorships refer to it as the statement of owner’s equity.
Statement of Financial Position
Balance sheet is the most recognized term for this statement. In easy to understand terms, it comes down to adding up liabilities in one column, assets in another, and capital accounts in the last.
You know that your balance sheet is correct when assets equal capital plus liabilities.
Statement of Cash Flow
This statement is similar to a balance sheet. Starting with the beginning cash balance, every change during the period is recorded from three sources: financing, investing, and operating.
Many things can be listed here, such as acquisition of equipment or property, owner contributions, bank loans, etc. If it changes your balance in any way, it is recorded.
Notes to Financial Statements
These are supplementary notes providing information not contained in the other four documents.
It contains a variety of disclosures, line breakdowns from the financial statements, supporting computations, and anything else that may be of use or interest to the readers.
1. Analyzing, Recording, and Classifying Transactions
The entire point of keeping an accounting record is to ensure that when it comes time to prepare the financial statements, that all information is reliable and complete.
For this to occur, all business transactions must be recorded. The general rules you need to follow are below:
Debit and Credit: Left vs Right
This is one hard rule you must know: credit means left and debit means right.
Forget all about the plus and minus. The abbreviations for the two are “Cr.” and “Dr.”
Every single account will have one side for credit and one for debit. Especially when dealing with video production, accounts for capital and liabilities normally have large credit balances, whereas asset accounts will usually have a debit balance.
So the process is simple: to decrease you credit, and to increase you debit.
|Accounting Element||Normal Balance||To Increase||To Decrease|
2. Chart of Accounts
You can only properly record transactions if you know what account they belong to. A chart of accounts will make everything simple for you.
If the chart is updated anytime there is a change, the chance of errors is greatly reduced.
Obviously, the names you use will be different but the chart below will show you how to set your’s up:
|110||Allowance for Doubtful Accounts|
|160||Furniture and Fixtures|
|170||Accumulated Depreciation – Fixtures and Furniture|
|190||Accumulated Depreciation – Service Equipment|
|OWNER’S EQUITY (300-399)|
|300||Mr. White, Capital|
|310||Mr. White, Drawing|
|420||Gain on Sale of Equipment|
|560||Taxes and Licenses|
|570||Doubtful Accounts Expense|
3. Journal Entry
Update your journal every time a transaction occurs. This way they are in chronological order and very easy to find if anyone has questions or needs some updated numbers.
4. Posting Entries
Once the entries have been made in the journal, they need to be transferred to your ledger.
This may seem redundant but redundancy is an accountant’s favourite word!
By posting into the ledger, you are classifying each transaction. A completed ledger page will look something like this:
|Cash||Accounts Payable||Mr. White, Capital|
|12,000.00||7,000.00||Loans Payable||Mr. White, Drawing|
|Service Supplies||Rent Expense|
|Furniture and Fixtures||Salaries Expense|
|Service Equipment||Licenses and Taxes|
5. Prepare a Trial Balance
This is an easy step. All you are doing is making sure that all your numbers add up so far. It will look like this:
|Fixtures and Furniture||3,000.00|
|Accounts Payable||$ 18,845.00|
|Mr. White, Capital||11,200.00|
|Mr. White, Drawing||7,000.00|
|Taxes and Licenses||370.00|
|Totals||$ 62,095.00||$ 62,095.00|
6. Closing Entries
At the end of the year, or whichever date you have chosen, you will need to close off your entries so they do not affect the next year’s numbers. This means that you must close them out to zero. Follow these four steps:
Close all expense accounts to the income summary
Close all income accounts to the income summary
|Taxes and Licenses||370.00|
|Service Supplies Expense||900.00|
Close the income summary to the corresponding capital account
|Mr. White, Capital||5,060.00|
For partnerships and sole proprietorships, close withdrawals to the capital account(s)
|31||Mr. White, Capital||9,000.00|
|Mr. White, Drawing||9,000.00|
7. Small business accounting software
One of the best ways to keep yourself on track is with the use of specialty accounting software. There are even some that are specialized for creative industries like video production, filmmaking and photography, etc.
Numerous brands exist, both free and paid, but everyone has their own favourite.
One of the best things about using this type of software is that it will keep you on track. They are very user-friendly and worth their weight in gold when it comes to keeping you from making costly mistakes.
I really like Wave Apps. It’s a great (and free) small business accounting software.
Accounting is incredibly important for your small business. Get it wrong and the wolf could be at your door: read Mr. Taxman. That’s the slightly scary reality that we’ve thus far avoided mentioning until the end of this article.
Understand the difference between Total Revenue and Gross Profit. Learn how to create solid accounts and create strong financial statements. And, if in doubt, hire an accountant!
That really is my best advice here. Whilst it’s good to know your numbers and have an eagle’s view of your various accounts, as you grow this will increase in responsibility and take more and more time.
Hiring an accountant will save you a lot of time, energy and resources. And it might even keep the wolf from your door, if you’re likely to make mistakes.
Do you have experience working with your own accounts? Or do you just hire an accountant for your video production company taxes? Let us know in the comments below.