It’s this simple:
- Most information you need comes from your (required) monthly S-Corporation bank account statement. In addition to the Dental Practice Financial Calculator, there is additional software required to handle the practice’s typical tactical financial tasks.
- If your practice management software handles the tactical workload of your dental practice (accounts receivables, billing, customer database, appointments, dunning letters, etc.), you don’t have to change a thing. If this tactical workload is being maintained in QuickBooks or similar financial software, you can keep using that software for this tactical work. Under the “cash method of accounting”, accounts receivable transactions are not recognized. Since revenue is recognized after payment is received, bad debt does not exist. In order words, an uncollectible receivable from a patient is not an expense because it was never recognized as revenue. From a “big picture’ perspective, this business segment (within the financial aspect of your practice) does not create any income statement transactions under the cash method of accounting.
- Using your PMS or QuickBooks software also applies to your fixed asset register. This basic functionality feature in any financial software calculates your depreciation expense and maintains a record of your fixed assets. (Fixed asset software can be easily found on the Internet for free.)
- Handle the accounts payable function of your dental practice using the online bill-paying feature offered by your bank. This free software will handle your accounts payable requirements. (For instance, you can set up recurring payment to vendors with fixed payments.) This online payment functionality and database (that you most likely already available to you) is all you need to handle your practice’s accounts payable.
Using this method, you can manage your dental practice and file taxes more efficiently - without the drudgery that comes with generating financial statements that are not even necessary. The Dental Practice Financial Calculator becomes your financial statements.
Here’s how to reconcile your monthly bank statements against the Dental Practice Financial Calculator. (Simply reconciling the Dental Practice Financial Calculator against your monthly bank statements would be a rigorous method of presentation in any IRS audit.)
Instructions for populating the "financial Input" software segment tab in the Dental Practice Financial Calculator using your bank statement:
The Financial Input segment uses the same income and expense classifications (and line numbering) used by the IRS in Form 1120-S U.S. Income Tax Return for an S-Corp. From a big-picture perspective, this allows you to classify and record expenses using the same categories required by the tax filing.
The data you enter into the financial input segment creates four unique income-statement reports that provide a better methodology for reviewing practice financials. The reports separate the income statement into four major activity-based categories so you can quickly understand the financial drivers that affect the profitability of the practice and spot unusual items that may require further investigation.
1-The first input line on the "financial Input" model segment is Revenue/Collections. (This figure is also used on line 1a "Gross receipts or Sales" in the model segment that displays the populated 1120-S U.S. Tax Returns for an S-Corp.)
Your bank statement has a section for “Deposits To Your Account.” Look at the total for checks deposited and the total for credit card deposits. Make sure no other deposits other than customer payments have been deposited. (It is a good general practice to have as few non-customer-payment deposits as possible in this business bank account.)
Add these check deposits and credit card deposits (excluding non-customer payments) and any cash patient payments and you have the first line on the "financial input" model segment for the month (Revenue/Collections).
2 - Your bank statement will have two other sections:
- Checks Paid From Your Account
- Other Debits From Your Account (including online vendor payments)
The transactions from these two sections is used to populate the 26 available expense categories in the "financial input" model segment for the month. (Use as few expense categories as possible.) In Excel you can add numbers and include notes in each cell to remind you how you categorized each transaction. Most transactions on your bank statement will be easy to categorize into one of the 26 available expense categories. (The time it takes to populate the “financial input tab” using your bank statement is perhaps the best financial review you could possibly perform.)
To make it easier, make notes on your bank statement. Jot down on your bank statement the financial input expense line number (you used) for each expense transaction. In our Excel model, each yellow “input cell” can be used to add numbers or perform calculations. Any expense category (e.g. “Travel and Entertainment”), could contain several expense transactions added together. Most transactions are easy to logically categorize. For instance, if you are running payroll twice per month, you’d have two payroll expense and payroll tax transactions in the bank statement.
Keep in mind you are only entering payroll and payroll tax expense and vendor expense transactions in the “financial input” model segment. There will likely be other transactions that are not tax-related expenses, such as a monthly loan payment related to the purchase of your practice. (Only the interest portion of the payment is a tax-related expense.) A transaction for a credit card payment would require a closer look. Some credit card companies group transactions into generic expense categories that could be used. Most likely, the transactions on your business card would be categories as Travel and Entertainment or Auto. As suggested above, it is a good practice to use as few transactions as possible other than payments for practice-related transactions flowing through this business bank account.
After you have reviewed all transactions in this section of the bank statement, each transaction line on your bank statement should have either a “financial Input” model segment line number or a brief note as to the nature of the transaction (e.g. loan payment).
Next, add all transactions that have DPFC line numbers assigned to them. The total should match the “Total Expense” line in the software tab. If both numbers agree, you have successfully recorded your monthly expenses into the model.
A good way to check your work is to add the transactions in both bank statement sections that have no expense notes associated with them. The last step is to add both transaction totals to ensure they agree with the combined totals of both bank statement segments.
On the bank statement, note the total of both sets of transactions for a grand total and do the same for both bank statement segment sub-totals that included all the debit transactions. By performing this additional audit step, you will be assured that all transactions have been taken into consideration.
Keep in mind that, when selecting expense categories for each debt transaction, most tax-related expense categories have the same impact in the total tax calculation. In other words, rent expense is no different than utilities expense for calculating taxable income. Incorrectly assigning a debt transaction to the wrong expense category is not a big deal. However, you want to be as consistent as possible each month so that your expense items are correctly and consistently classified in your practice model. Using this simpler methodology to populate the Dental Practice Financial Calculator replaces the need to generate conventional financial statements.
The second financial statement created from the trial balance accounts in each closing period is the balance sheet. There are no tax requirements for maintaining a balance sheet. Believe it or not, it’s very easy to create a balance sheet that would result in the same exact balance sheet positions as generating a financial statement using QuickBooks or similar financial accounting software. The Dental Practice Financial Calculator contains a tab to create a balance sheet.
First, let’s review a few basic principles of accounting. Within bookkeeping/accounting, there are two sides for every individual transaction. There are five fundamental elements in financial statement (assets, liabilities, equity, income and expenses) where both sides of each individual transactions are recorded.
All accounts in the chart of accounts are known as the trial balance. All account balances in this statement of accounts must total to zero. If the trial balance does not total to zero, there is a mistake that must be adjusted. There is also a model segment that creates a trial balance. This model segment is a calculation that allows you to determine if your trial balance accounts total to zero. If it does not total to zero an adjustment must be recorded. (That will be explained in the following section of this document.)
Unlike the income statement, which is a period statement, the balance sheet is a perpetual statement. There are only two financial statements that consume all the accounts within the trial balance of accounts. You may have seen references to a third statement called the cash flow statement that only represents a calculation using all the accounts in both financial statements.
Creating a “Balance Sheet” in the model is this simple:
There are two sides to each individual transaction on the income statement or balance sheet. In the balance sheet, each account balance must have a source or methodology to “prove” the balance is correct. The important point is that if the balance in the account does not agree with this source or methodology it must be adjusted so that it agrees.
Backing into a balance sheet merely means we’re using the source or methodology as the period balance for each account. Below are the documents used to create a balance sheet that could be used in any dental practice:
Asset - Cash – Use the month-end cash balance on the first page of your monthly bank statement.
Asset - Accounts Receivables – Use the month-ending balance generated from your practice management software or financial software as your month-end balance. To put it in perspective, a business that files taxes under the “accrual method of accounting” would have to make a journal entry to adjust any imbalance in their balance sheet accounts receivable position to agree with this document. This methodology would also include creating a document listing of each customer’s accounts receivable balance whereas the total would also agree to the balance sheet position.
Asset - Fixed Assets – Use the fixed assets register as explained above. (Once again, fixed assets software can be easily found on the Internet for free.)
Liability - Accounts Payable – Use the pending payments as they appear in your online bill paying feature offered by your bank. Before every closing, enter all open invoices into your online account. These payments have been entered into the account with selected payment dates after the current period-ending date. (Print a copy to support your balance sheet position.)
Liability - Debt – Use your monthly statement if you have debt.
All of the balance sheet account positions described above to demonstrate the assigned dollar value (and which are required to successfully manage any dental practice) are logical and straightforward. The only account that requires further explanation is paid-in capital, which appears in the equity section of the balance sheet.
The easiest way to explain paid-in capital in the Practice Model is through a business scenario. (The home page of this website offers a link to instructions on how to run a "what-if" scenario through the Practice Model.) The purpose of our scenario is to help convey the features in the model. In our example, the owner started his practice 10 years ago and has used the DPFC model for 24 months. The current balance sheet paid-in capital position is $475,000. Below is a scenario of the history and how he could “prove” this balance sheet position.
In this example, Dr. P did not purchase an existing practice. Instead, he funded his new practice using a personal investment of $250,000. Once he deposited his personal check into his business bank account, his first theoretical balance sheet entry would have been a debit to cash and a credit to paid-in capital. He then purchased the necessary fixed assets to start his practice, spending a total of $200,000. His second balance sheet entry would show a debit to fixed assets and a credit to cash. The remaining $50,000 cash was used as his starting working-capital position. (Working capital is defined as current assets minus current liabilities.)
When Dr. P started his practice, his first obligation as a business owner was to pay his staff and bills and then maintain a sensible working capital position. Whatever cash remained at the end of each month above his predetermined working capital position went to him as W2 compensation. In the first five years in business, he occasionally had to deposit other personal checks into his business account to maintain a predetermined working capital position.
The journey entry for these deposits of personal funds would have also been a debit to cash and a credit to paid-in capital. (These transactions do not have any effect on his S-Corp, or W2 tax filings and are not recognized under tax law.) The important point is that this “loan to yourself” can be paid back at any time from your business bank account without flowing through the personal W2 statement. These transactions are equivalent to taking cash out of one pocket then putting it in another pocket. Under the cash method of accounting, cash deposits and withdrawals within the balance sheet paid-in capital account fall outside the scope of tax law of reporting W2 compensation. This is one of the very few examples under tax law where a business owner can draw personal cash from the business account without it being reported as W2 compensation.
Ten years after starting his business, the $475,000 balance in paid-in capital represents the funding of his current working capital needed to safely maintain his practice. In addition, it represents the funding of accounts receivable that have yet to be collected. It also represents the un-depreciated investment value of his fixed assets. In theory, his current accounts payable balance sheet position should be deducted from this $475,000 paid-in capital position to calculate his current “true” personal investment in his business.
These are the primary asset and liability accounts that a dental practice would use under the cash method of accounting. There are five fundamental elements in financial statement: assets, liabilities, equity, income, and expenses. (Assets minus liabilities equal equity.)
If you purchased a practice, there would most likely be other account positions in your current balance sheet that represents transactions related to the purchase. They would mostly likely be titled “goodwill” or “intangible assets.” Add these balances as assets and any associated debt as liabilities. You would most likely have an “amortization schedule” to support your balances. (The balance sheet model segment creates a simple document to support your equity balance sheet position.)
By following these simple steps, you can eliminate the costly tactical workload required to generate monthly and annual financials statements prepared by an accountant or generated using QuickBooks or similar financial accounting software.
The last step is to estimate the “annual cost” to receive financial statements prepared by an accountant or generated using QuickBooks or similar financial accounting software. Using this simpler methodology to close your books will not only eliminate the need for financial statements, your practice financial data will be in an Excel-based model designed for dentistry -- exactly where it should be.
The Dental Practice Financial Calculator creates five graphical or summary reports that provide a unique method for reviewing monthly practice financial results. (This feature is only one of the five important “functionality features” offered in this Excel-based model designed for dentistry.)