Accounting - What do you do?

[MatrixGamer]

I'd like to see two things come out of this thread. 1. give people a chance to share what they do so people can read and learn about an important business skill, and 2. try to improve the practices of independent game designers in this regard.

One of my gaming mentors, Steve Lortz (Quacktica) used to work for Dave Arneson back in the 70's and 80's. Oneof his skills was book keeping. His vantage point on the hobby allowed him to see how people were doing business back then. For the most part is was pretty sad. When a game seller tried to get him to invest in his venture - Steve looked at the books and then got the guy to hire him as a consultant to put the books in order. Once that was done the game seller learned that he was losing money every time he sold his most popular game!

Okay - the point of that story is that knowing where your money is going is VERY important. When I first thought to publish Matrix Games (in 1995) I realized that I knew knothing about this skill and that I should study it before I did more. I didn't want to be seen as non-professional or get a bad rep as a dishonest or incompetent businessman. So I studied and here is what I learned.

1. Most people ignore their finances. At best they throw their reciepts in a bag and never look at them. They dread the whole topic. This does not bode well for their business success.

2. Some people write down their information in their check book and balance it each month. This is better than 1. but doesn't tell them what is going on inside their business.

3. People who have heard of accounting and think that it is probably important, go to office supply stores and buy a "Dome Guide". This is "single entery accounting". In effect it is a glorified check book. Each transaction (a sale, or purchase) is recorded in a single account. Accounts are based on catagories like rent, book sales, utilities, entertainment, gas, etc. The columns are added up once a month and put onto a summary page in the Dome Guide so that you keep a running total an how much is coming in and going out. I used this method when I ran my psychotherapy practice back in the 90's. You can do it if you are a sole proprietor. The draw back is that if you mess up the math it is hard to spot the error later.

4. Few people use "double entery accounting". They teach it in business school. If you want to incorporate you have to use it. Basically you take each reciept (a purchase or sales slip and any other business papers you have) and record them in a journal. Each entry is made in two columns. The amount is the same in both columns (so the double enteries balance). So if I pay for materials my asset - materials goes up and my asset cash goes down. If I buy gas my expense- gas goes up and my asset cash goes down. If I sell a book cash goes up and income goes up, and my cost of sale goes up and my book inventory goes down. So you can see that this allows you to see what is going on inside your business. It's a bit complicated to learn but once you know it it is like playing a game in itself.

Okay - so don't just chime in and say how you do accounting! Say how you do it and why you do it that way. This will show a wide range of knowledge levels and (if you read what people say about "why") you'll see how people improved their skills.

I'll start...

I use double entry book keeping. In 95 I was in the "throw it in a bag" group and knew that wouldn't work. I needed to be able to accurately track my cost of sale so I'd know if I was losing money each sale! In the late 90's I had a private practice in which I used single entery book keeping. I read on double entery accounting but honestly it scared me. Doing the data entery  was emotionally draining. It took many years of exposure and practice to become used to it. For a while my wife and I sold use books at SCA events (if gaming is not an industry - the SCA is not a market!) which taught me how to price books. As I've written before I do my own printing so I needed to track costs of materials as well as cost of books. There is a LOT more for me to learn but I can now understand my tax form and I know why I'm not making any money!

So lets here what other publishers are doing and why.

Chris Engle
Hamster Press

[Resonantg]

Thank you for posting this! :c)

I had not considered much about this since I'm still in the early stages of game development and there's a lot of stuff to go through yet before I even consider publishing.  Funny thing for me is, I work currently as a Hotel's Night Auditor, and have to balance the books every night.  The hotel I work for has no computers so I do it all by hand, in double entry format, which is precisely the method you are talking about.  I just never knew the name for it.  So the instant you mentioned it and explained it, it became crystal clear why I was doing this method for the hotel.  

I can vouch for the wisdom here.  It's very easy to do and to set up, but it's a bit tedious at times.  Lord knows I've played "hunt the penny" for hours when reciepts don't match the totals I have, and you must figure them out, especially if some day you're going to be audited... and all businesses get audited.  The more slop you allow in your books, the faster you end up losing money, or get cheated, or worse get in trouble with the law.  Also, the more people involved in your venture, the more critical it is to track all of this.

So, yes indeedy!  This is such a crucial skill.  Even if you use this, you still need to file things in multiple folders, or in the case of my hotel, our "box archive" where they at least have things bundled and broken down by month and year.  But if you get a ticked off retailer or customer who suddenly claims you cheated them, you can quickly find out who's right financially.  And if you're dealing in credits to retailers, you have a papertrail to back up your claims for them owing you money if they contest your charges.  (trust me, it happens more often than you think) :::rolls eyes:::

Once again, thank you for posting this wonderful little thread.  I only hope that I added something of value to this advice that will save people a TON of trouble and keep them out of court, be it bankruptcy, small claims, civil or criminal. ;c)

Now, if I can only follow my own advice... ;c)

[Valamir]

I use Quicken to track everything.  It fakes its way through double entry book keeping by using an accounts (balance sheet items) and categories (income statement items).  It also lets you assign a user defined class to each transaction which I use to identify each transaction by product line or general company expenses.

What's nice is you can set up the categories to match the Schedule C categories for Sole Proprietorship taxes so it becomes pretty easy to fill that out.  What's also nice is that you don't really need to get a seperate business account.  I can run all of my transactions through my normal personal checking account and credit cards and just sort them all out in Quicken by what category I assign it to.

IMO any computer savvy financially responsible person should make a point to use quicken (or similar) for their own personal finances whether they own a business or not.  Its a pretty powerful tool.


Inventory is another matter entirely and a crucially important one.  I have a feeling that many Indie Publishers run afoul of the Inventory related tax rules.

In a nut shell you can expense your office supplies.  You can expense your GenCon fees.  You can expense (usually) 50% of your travel and entertainment.  But you CAN'T expense printing costs.  Since printing costs are often the biggest expense Indie Publishers will have, doing this wrong can really screw you up.

Basically you can only expense your printing costs on a unit by unit basis AFTER the unit sells.  So if you print 1000 copies for $6.00 apiece you've spent $6000.  But you CAN'T write off a $6000 expense on your taxes.  Rather you have to track an Inventory Account which starts with $6000 in it.  If you then sell 400 copies of your game you reduce your inventory by $2400 (400 * $6).  Your inventory is now $3600.  On your schedule C you have to fill out your beginning and ending Inventory and the difference (the $2400) is your Cost of Goods sold.  THAT'S what you actually get to deduct on your tax return.  Next year your Inventory starts at $3600 and you repeat the process.  When you print a supplement you increase your Inventory account by those printing expenses and as you sell either product you reduce your Inventory accordingly.  Filling out the little worksheet on the tax return will tell you how much your Cost of Goods Sold is for the next year, and so on.

Clearly this requires a pretty dilligent tracking of Inventory.  Not just sales but also promo copies, damaged copies, etc (all of which reduce your Inventory level and thus increase your deduction).  If your beginning Inventory Balance on your tax return doesn't match your ending balance on the prior year's tax return you're in trouble.  So you better keep good records.

I track my inventory on an Excel Spreadsheet.  Its a little kludgy but its worked so far, and its saved me from having to invest in a more powerful accounting package like Quick Books.

[MatrixGamer]

I have a copy of Quick Books but don't use it (it goes back to that fear of data entery thing). As I understand it though Quick Books uses double entery book keeping but you don't see it. It works well for retail stores since is tracks inventory based on what you paid for it. If you are getting your printing done POD or by a regular printer this should work. If you manufacter though it falls flat. Since most people aren't doing this (I'm just weird that way) this shouldn't be a problem.

Right now I do my books on paper but this can't continue forever. I may switch to Excel as a transitional step to a better program.

I've done transitional steps a lot over the years. Progress not perfection!

***

This printing cost - not expense - is an odd notion to people who don't know about this.

I start off with cash - an asset - I buy paper - a asset I can turn into books - I print books which converts the asset paper into the asset book inventory - then (hopefully!) I sell the book. This converts the asset inventory into an expense I can take off on my taxes - cost of sale. As long as I can sell something its not an expense.

Mind you I've written off old stock as not sellable which changes it from an asset inventory to an expense - spoilage. At which time you're suppose to pulp them (or tear the cover off so they can't be sold). I guess you can give them away (to save you self the cost of garbage hauling) but you can't make money on them.

See what I mean about niggly little details. Is this a gamist wet dream or what?

Chris Engle
Hamster Press

[Vaxalon]

This whole thing makes me glad I haven't gone indie yet... I'm not up for the diligence of this kind of bookkeeping.

I'll stick with writing manuscripts for other people.

[Valamir]

Well, if you get paid for it you still have to file a schedule C with your tax return.  You may also have to file any of a variety of other forms and such to show that you don't owe any employee witholding.

If you buy printer cartridges or reams of paper to print off any of the manuscripts you write you can likely deduct those.  If you travel to see the person who hired you, or have dinner with them and talk shop you can likely deduct 50% of those expenses.  If you have a website where you feature your work or advertise yourself you can deduct the hosting costs.  If you wanted to get a little aggressive you could deduct the cost of games you bought for inspiration for your own work or any money you've donated to the Forge.

In other words.  If anyone pays you money for any kind of service outside of a "payroll employer"...you technically need to track it and pay tax on it.  And if you're going to pay tax on it, you might as well try to pay as little as possible.  And if you're going to pay as little as possible you need good records.  Ain't no way of getting around it...except tax evasion and hoping you're too small to get audited.

[Vaxalon]

I declared the $150 I made last year writing games.   I might have spent $40 on it, total... MAYBE.

Is it worth an hour of my time, to remove $10 from my taxes?

[MatrixGamer]

Vaxalon, on $140 I don't think you need to worry about it. But if you want to here is a good way to start.

1. Keep all the reciepts of things you buy for the business. (BTW you are a sole proprietor. You can do all this under your own social security number)

2. Write a sales slip for all the books you sell.

3. Deposit the cash in a bank account designated for the business (I have a separate account but I could have used a sub account in my existing account). Keep your deposit and withdraw slips.

That is basically all the "business papers" you need. If you just put them in a bag that is better than nothing!

What does these papers mean?

1. When you spend money you are either a) buying an asset (usually books to sell - inventory) or b) paying for something, an expense (that you can write off on your taxes).

2. When money comes in it is cash. That's income. Product goes out, which reduces your inventory. The cost of that inventory now becomes a special expense called "cost of sale" that you can now write off on your taxes. So sales slips do two things, they track cash/income and inventory/cost of sales.

3. When you deposit the cash in the bank it exchanges one asset for another. If you income does not equal your deposits it is a red flag for auditors that something is wrong. So run everything through your account.

If you do only this much you should be fine with the government. They are after all you silent partner. You do your work and they provide streets, police, courts, education for the work force, health care, etc.

Chris Engle
Hamster Press

[greyorm]

I haven't had to worry about inventory, since I'm selling wholly via PDF currently. The only thing I need to track is the amount of money made (each sale) and where that money goes (if I need to use it for anything business-related, and the only expense I've had thus far is hosting). Hence, I've had no need (yet) to do anything fancy or frightening as an indie publisher.

My tech. consultancy business, OTOH...hoy...

[ADGBoss]

Ok I do have a question. Accounting does not scare me but frankly it is something I know little about other then it is necessary.

What about if you use a POD service? Someone else prints the copy for you and sends it to the customer, you get your cut in a monthly check.

Do you still have to count THOSE books in your inventory? What if you have some real inventory and some POD?

I apologise if I sound like a goof :) but I will probably need someone to hold my hand once the two games I think will sell are ready to.  So I may end up going to an accountant or consultant initially.

Sean

[MatrixGamer]

I believe that when I mentioned accounting it probably freaked out a lot of people (I know it used to freak me out!) So I thought it would be good to explain the basics of double entery book keeping so you can see that it really isn't that hard.

There are only six basic accounts: Assets, Expenses, Cost of Sales, Income, Liabilities and Equity.

When reciepts are recorded in an account book the numbers are place in one of two columns. The left column is the "Debit" column. The right side is the "Credit" column. Three of the accounts increase on the debit side and three increase on the credit side.

Account   Debit         Credit
Asset       increase    decrease
Expense   increase    decrease
COS         increase    decrease
Income     decrease   increase
Liabilities   decrease   increase
Equity        decrease   increase

Business is very repetitive so the same kind of transactions happen again and again.

1. You buy something: Debit side - Expense increases, Credit side -Asset (cash) decreases.

2. You buy something to sell: Debit side - Asset (inventory) increases, Credit side Asset (cash) decreases.

3. You sell something: Debit side - Asset (cash) increases, Credit side - Income increases.

4. You hand the goods over to the customer (likely right after you take their money!) Debit side - Cost of sale increases, Asset (inventory) decreases.

What expenses are most common? Postage, office supplies, travel and entertainment costs, advertising, web page.

What asset are most common? Cash, cash in the bank, inventory for sale, and money people owe you (also know as Accounts Recievable).

But what numbers do I write in the two columns? I hear you cry. Simple! Look at the reciept your recording. The amount there is written in both columns. It may be broken up sometimes (Say I spent $20. $10 for office supplies and $10 for a book I will resell. 20 would be on one side while 10+10 would be on the other. They balance.)

There are more details but they all just elaborate on these basic ideas. You now know the basics of accounting.

Chris Engle
Hamster Press

[MatrixGamer]

What about if you use a POD service? Someone else prints the copy for you and sends it to the customer, you get your cut in a monthly check.

Do you still have to count THOSE books in your inventory? What if you have some real inventory and some POD?

These are good questions.

First lets look at selling PDFs. You never have a physcial product in hand. You spend nothing to send it to the customer (save paying for the web page that you've already recorded as an expense). There is no cost of sale because you are essentially selling a service. This was what I did when I had my psychotherapy practice. Sales are Debit - cash, Credit - income.

Next look at a POD transaction. Say the person contacts the POD directly and they pay you monthly for the books they sold that month. This is just like selling PDFs. You never had possesion of the books. It will be recorded as Debit - cash, Credit - income. BUT there will be a fee to the POD guy that is recorded as Debit - expense (POD fee), Credit - cash (which decreases it).

Say the POD order comes to you, along with the cash and you forward it to the POD guy. If you send money to them and they send the book on without it ever coming into your posession then it's just like above. If you order it and they ship it to you and you ship it on, then it is in your inventory. This would be recorded as Debit - inventory increase, Credit - cash decreases. When you ship it out it is recorded as Debit - increase cost of sale, Credit - inventory. The cash - income entery would be as shown above.

If you keep some book in your possession then they stay in your inventory account. They only get transferred into cost of sale when you finally sell them.

The thing to do is not get very complicated. Look at the reciept in front of you and ask "What just happened?" If a book came into your hands it was inventory - if it didn't it wasn't. If you ever are audited what the accountant is looking for is to see if you record keeping system makes sense. If you can show them your thought process, they will be happy (or unhappy but if that comes up you will learn how to do it right.)

In the end, the government doesn't want to put people in jail. They just want to be paid. If you work with them it works out. If you're paranoid then they will be as well. Transparency in record keeping means you can explain why you did what you did and that anyone can come in and look at it and agree they would have done the same.

See how the niggly details start coming up? I came up with my answers to these questions by going back to the basics and thinking through what actually happened. I broke it down into smaller and smaller bits till it made sense.

That's bean counting!

Chris Engle
Hamster Press

[ADGBoss]

Thanks! Yes that does make a bit of sense.

Another question I would not mind seeing answered, more for curiosity sake, is how many hours a day / week / month does it take up for those who do their own accounting?

Again thats just curiosity more then anything.

Sean

[Valamir]

Next look at a POD transaction. Say the person contacts the POD directly and they pay you monthly for the books they sold that month. This is just like selling PDFs. You never had possesion of the books. It will be recorded as Debit - cash, Credit - income. BUT there will be a fee to the POD guy that is recorded as Debit - expense (POD fee), Credit - cash (which decreases it).

Say the POD order comes to you, along with the cash and you forward it to the POD guy. If you send money to them and they send the book on without it ever coming into your posession then it's just like above. If you order it and they ship it to you and you ship it on, then it is in your inventory. This would be recorded as Debit - inventory increase, Credit - cash decreases. When you ship it out it is recorded as Debit - increase cost of sale, Credit - inventory. The cash - income entery would be as shown above.

Definitely take a good hard look at the actual terms of the contract you have with the POD service and consult with an accountant on this one.

It is very easy to imagine a situation where the POD contract specifies that you are the owner of any unsold inventory.  Especially for services that have a 10 copy minimum...if they print 10 because they had requests for 2 and the remaining 8 sit in inventory...it may well be considered YOUR inventory even if you never touched the book.

That's getting beyond my ability to say for sure.  Definitely seek a professional if you start having unusual situations, especially if the dollars get larger.

[Resonantg]

ADGBoss wrote:

Another question I would not mind seeing answered, more for curiosity sake, is how many hours a day / week / month does it take up for those who do their own accounting?

Of course I'm not taking this from a game perspective but from a service providing business, but it may help here.

Firstly, it's all dependant on how much business you do.  With my experience by a hotel, we have to do the books daily.  But then again, we do a lot more business than I suspect most indie game developers do in a month.  Even so, you should pick out a consistant time frame in which to do this, be it daily (hopefully you'll need to), or weekly or monthly.  But no matter what, whenever you do a transaction dealing with your business, do the entry right then and there if you can.  Don't put it off, things will get lost otherwise and then you're going to get embarrassed when you have to check with your customers to verify your books.

Secondly, it doesn't take that much time.  Again, in my experience, with double line entry, if you've kept your books straight throughout the time period with dillegent entry, you'll have no issue in balancing things in an hour or two per period.  It's only when things don't match that it takes a while.  I've been able to balance several thousand dollars worth of transactions by hand, with double-checking and running calculator tapes in  about 90 minutes.  The key to this is dilligence in entering your transactions as you go though.  That can take as little as one minute per entry as well.  And using a computer or spreadsheets can speed this up even more.

Lastly, if something does go wrong and stuff doesn't balance, the better organized and doublechecked you have your data, the better chance you'll have to reduce the time it will take to find your error.

Anyway, I hope this is helpful too. :c)