Bookkeeping For Cannabis Industry Must-knows 4 Proven Best Practices

The US Cannabis Industry

Due to its illegal status at the federal level and as the business is growing fast with a variety of emerging sub-industries, Cannabis companies are facing ever more complex issues that are unique to the industry and require their operators to be extra careful when it comes to keeping their books accurate and organized. Hence, bookkeeping for Cannabis industry best practices is proven to be necessary for businesses in the field.

Let’s go through everything must-knows and best practices about bookkeeping for Cannabis industry in this article!

Banking

Not many federal-regulated financial institutions welcome those who run their business in cannabis as it is still classified as an illegal drug in many states, thus making its risky and problematic reputation. Apparently, the lack of banking options from the beginning subjects cannabis businesses to multiple issues, including internal and external theft, misallocation of funds, payroll, and insurance paid in cash.

It is not totally hopeless to find a bank that can work with your cannabis business though if you are willing to go through complicated application procedures in which regular financial statements must be handed in for reviews. The banks often do this quarterly, but monthly financial records should be ready at any time for submission since it is likely that they will be investigated to support what is reported. The banks will also pay attention to fluctuations in your report, and you don’t want your account to be shut down because you can’t account for such inconsistencies!

Cash flow control

Needless to say, it is challenging to manage cash-only businesses, and those trading in cannabis are no exception. Without a proper tracking system in place, tracking cash transactions by transaction can become a mess. In this case of cannabis – a federally controlled substance, every piece of inventory matters, so any suspected activity may cost the companies their precious licenses or even lead to criminal charges against concerned individuals.

Anti-money laundering

To prevent money laundering, marijuana companies must meet strict requirements regarding accounting and keeping records of every activity and transaction during the course of business, “from seed to sales”, and from suppliers, distributors, retailers to customers. Moreover, for any transaction or a series of transactions that total $10,000 or more in cash, cannabis businesses have to prepare Form 8300 for tax purposes, the filing of which can be confusing with errors resulting in serious fines and audits. 

Taxes

According to Internal Revenue Code Section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” In compliance with this, cannabis-related businesses follow strict limitations when reporting taxable income, with the cost of goods sold being the only deductible expense. Accounting processes, as a result, must implement complete record-keeping to ensure a compliant inventory environment.

Seed-to-sale tracking

 Cannabis business and accountants working in the industry do not often talk about seed-to-sale tracking with much enthusiasm. Every state has its own seed-to-sale system to monitor the production and distribution of Cannabis plants, causing a great deal of confusion for growers, distributors, and other stakeholders involved who need to adhere to changing rules of each local government. 

Specifically, depending on its preference, each state may require a different software system to trace and monitor the plants and finished products from inventory to the point of sale. The three popular seed-to-sale software, Biotrack, MJ Freeway, and METRC, however, tend to have unreliable reporting and it is also difficult to integrate them with existing accounting systems.

Bookkeeping for Cannabis Industry

Bookkeeping is fundamental to accounting, and with all the federal and state regulations that make accounting for cannabis extremely complex, anyone who deals with keeping the books must do it right. 

In particular, bookkeepers should know the ins and outs of Section 280E in the tax code because of its major implications on the business’s actual income and profit. Unlike those working for most small-to-medium-sized businesses, accountants and bookkeepers in Cannabis companies must get used to concepts such as cost accounting, accrual accounting, generally accepted accounting principles (GAAP), and absorption accounting. 

Since many of these principles are not required for everyday small business accounting, a generalist accountant may not be familiar with them. Finding a person with the necessary skill set to keep good records for your cannabis business, therefore, is important in several ways.

Getting ready

Whether outsourcing professional bookkeeping services or hiring an internal bookkeeper, cannabis businesses benefit greatly from having their books handled by people who have experience in the industry. It will be too late to get your accounting system set up and begin organizing your expenses months after the business starts operations. Money is spent on a daily basis, and without proper tracking of day-to-day expenditure and transactions, catch-ups of bookkeeping will turn into a nightmare with a higher tendency of errors. Even for pre-revenue companies, having a comprehensive bookkeeping system in place is essential at the beginning of their journey, when they need to know how much is spent on what before making the first profits.

Raising money

The key to keep a cash-intensive business like Cannabis companies up and running is said to lie in fundraising. Not to mention the difficulty of finding investors who understand the possible pitfalls of the industry, there are a host of components that accountants and bookkeepers can’t overlook if they would like to attract investors to their business. However, it all comes down to the basics such as providing organized books and accurate financial reports that show effective internal controls and accounting policies. There is no one who wants to entrust their money in incompetent hands, and for marijuana businesses that wish to access capital, it is expected that they can express their efficiency in financial management through good bookkeeping practices.

Taxes and deductibles

As mentioned above, under the regulation of IRC 280E, Cannabis companies cannot take deductions from business expenses such as rent, vehicle, and marketing like other companies because their business is related to a controlled substance. Despite this tax limitation, professional accountants can help to legally reduce taxable income by allocating costs to inventory and the cost of goods sold, which is mandated by IRC 471.  

Besides the reputable IRC 280E, there are other tax requirements that accurate bookkeeping can help cannabis businesses fulfill, thus maintaining their license while staying out of trouble with the IRS.

GST/HST and Provincial Sales Tax

Once a proper accounting system is set up with organized bookkeeping practices guaranteed, Cannabis companies can be at ease that they are paying the correct amount of sales tax they are supposed to. What’s more, based on the tax collected it will be easier for them to plan ahead, using the expected tax refunds for business operations. 

Excise duties

Exercise duties, applied at the time the cannabis product is delivered to a buyer, are compulsory for any cannabis licensee. Duties of each transaction must be kept track of, and the higher duty payable must also be reported. Those who own a business in the industry had better have a good grasp of what rules and regulations that the excise duty framework entails to know how to calculate duties or have a reliable accounting team to do this meticulous task for them. Plus, they should do it from early on too before all the transaction receipts pile up or go missing!

Bookkeeping for cannabis industry best practices

Knowing the rules

Whether it is for medical use or adult purchases, businesses associated with marijuana are restricted by countless written and unwritten rules, the sheer number of which may shun anyone wishing to be engaged in this space. Those who overcome the hurdles to take on the role of bookkeepers in Cannabis companies must be well aware that there is no room for ignorance here. Before things can be done “by the book”, first and foremost, bookkeepers must find out what “book” to read. Both federal and state laws have their own specifications regarding cannabis businesses, and it goes without saying that bookkeepers need to know them like the back of their hands to stay compliant. Legality, undoubtedly, is a top concern when it comes to the future growth of the cannabis industry.      

Going digital

As the foundation of good accounting and financial management, bookkeeping is all about being organized. You may have heard about digitized receipt services such as Shoeboxed that help to keep your documents safe, both online and offline, but there are more advantages of applying technology in bookkeeping than you would imagine. 

With brilliant features including verified data that is audit-ready and easily located, customized expense reports, and integrations with a variety of accounting systems, Shoeboxed offers an actionable data tool. Just like any other business, accurate records and transparent accounting procedures are what a cannabis business needs to track its finance and enhance its credibility with the bank and other financial institutions, as well as potential investors.

Shoeboxed provides digital secured quick bookkeeping solution for businesses

Software workarounds

A cannabis company is a complicated entity that involves several sub-industries (farming, chemical manufacturing, food production, and retail), and each requires all kinds of reporting pursuant to the many legislations at the state and federal levels. Another big headache for cannabis bookkeepers and accountants is the buggy seed-to-sale software requested by local regulations. Unfortunately, software that are specifically designed to assist this complicated process are still lacking and don’t work well with widely used accounting systems. 

While looking for more plausible solutions, specialists in the field suggest we make use of current software, combining their functions to serve our needs. For accounting, Quickbooks and Xero are popular choices although some attempts must be called for to create charts of accounts for each business stage. The good old Excel is also a basic tool for cost accounting, reconciliations, consolidations, and so on. If one realizes its versatility and puts decent effort into utilizing its functions, preparing monthly reports or creating accounting templates can become much easier. Finally, the unsolved issues of seed-to-sale software must be acknowledged so that predicted errors can be avoided. Making do with what we have seems to be the right strategy, at least for now.

Checks and balances

Problems with bookkeeping in cannabis businesses are mostly due to the huge amount of cash being collected, which may lead to undesirable consequences ranging from careless mistakes to fraud. There are so many things that can go wrong and result in inaccuracies found in the books when a lot of business activities occur every day. Many of them, however, can be prevented by implementing checks and balances consistently during operations. 

For example, cash counts on a daily and weekly basis can help to identify discrepancies between actual cash on hand and the records in the books. Likewise, sale receipts must be kept carefully and compared to the receipts listed regularly. It is also a good idea to have two people do the cash collection and reconciliation separately to lower the chance of a financial thief. In this way, professional bookkeepers and accountants make a perfect couple who compliments a reliable internal control system.

We have yet to know when the federal legalization of cannabis is coming and how it will change the bookkeeping practices in Cannabis companies. Whatever may happen, there is truth in keeping accurate and organized books for business smooth operations. 

What do you think about the future of the cannabis industry from now on? Do you have more tips on good bookkeeping for cannabis industry to add?

Don’t hesitate to share with us your opinions in the comment section below!

SaaS vs IaaS vs PaaS Simple Definition & Best Features

Cloud computing has been a heated topic in today’s technology industry. Actually, cloud computing is not a new concept. It was invented in the early 1960s and it came into use in the modern context about 15 years ago when Google first introduced the term to the industry.

However, there has been a rapid shift towards cloud computing in business operations in recent years. Although in the past, only large companies could deploy cloud computing solutions due to high investment cost, the current expansion of cloud service models including SaaS (Software-as-a-Service), PaaS (Platform-as-a-Service), and IaaS (Infrastructure-as-a-Service) has allowed businesses of any size to access the clouds. Shifting to the cloud is a big decision and a deep understanding of the different features of these three cloud services is always highly recommended. 

What kinds of computing services can these models offer to your business? Interestingly, the answers lie in their names. SaaS (Software-as-a-Service) provides access to third-party software on the Internet. In terms of PaaS (Platform-as-a-Service), cloud providers handle the platforms where you build your business data and applications. IaaS (Infrastructure-as-a-Service) brings you computing and storage infrastructure, assisting you to create your platform. Nevertheless, there are many more important things you need to know about these models than just their names.

SaaS vs PaaS vs IaaS

What is SaaS?

SaaS (Software-as-a-Service): Out of the three models, SaaS applications can be the most familiar to you. To understand more about this model, now let’s take a look at Gmail. Are you aware that it is a software service that can store all your data and allow you to get access to it anytime you want and from any devices that you are using (web browsers, cell phones, etc.) as long as there is an Internet connection?. Generally speaking, SaaS delivers a software application that can be used and purchased on-demand via the Internet. As the software runs on the cloud, it does not require any specific installation on your devices. Now let’s think a bit more. If many people can use the service on the same cloud, how can the data of different user experience be segregated? Actually, for each subscribing cloud user, there is also a corresponding instance of the SaaS application running on the cloud. Therefore, SaaS can perform what is known as application customization, letting customers alter the configuration and store their data. 

Example: The embracement of SaaS products can range from personal use to business deployment. Some popular SaaS products that can be listed are Netflix, Facebook, Google Workspace apps, Microsoft 365, Shoeboxed, Zoom, Adobe Creative Cloud, Amazon Web Services, Slack, etc. 

What is PaaS?

PaaS (Platform-as-a-service): Instead of providing you specific and finalized on-the-cloud apps that you can directly consume as SaaS, PaaS offers a cloud deployment platform so that you can freely write and develop your own applications, regardless of whether they are completed or still in progress. A PaaS is a great tool for your company’s in-house developers to create more customized applications for your customers. These PaaS platforms present you with a high level of abstraction. In addition to creating software by using the tools and libraries from the cloud providers, you can set up the configuration and get control over the software deployment. Your developers do not have to be concerned with the needed quantity of memory or processors your application will consume as the cloud vendors will handle all data center resources assisting the tools. All your company needs to manage is the data and applications. This can save your company a lot of time and money because you do not need to purchase and manage the underlying hardware and software. There are many different types of PaaS platforms, but they all provide you with app hosting, deployment environment, and other related services. 

Example: Window Azure, Rollbase, Google App Engine, Long Jump, etc. 

What is IaaS?

IaaS (Infrastructure-as-a-service): In the IaaS model, you are provided with a virtual server for a while and charged based on the amount of resources you have used. You are allowed with the accessibility of infrastructure via the Internet that includes server, storage, other peripherals devices as well as managed services assistant operations and applications instead of buying infrastructure outright. If you need storage or virtual machines to develop your own platform, you can count on the IaaS model. Moreover, as you can use a Web-based interface regarded as a console to manage your IT operations, you are able to self-provision this infrastructure. In simpler words, you can scale the infrastructure up or down depending on your need after installing the needed operating systems and applications. 

Example: One famous example is Amazon EC2, providing its customers even with virtual resources that can be listed as CPU, memory, OS, and storage. Others are Flex Metal Cloud, Cloud Infrastructure by Google, Cloud Services by IBM, Digital Ocean, Linode, Cloud Services by Alibaba, Hitachi Enterprise Cloud, Hewlett Packard Enterprise, Open Cloud by Rackspace. 

The Differences Between SaaS, PaaS, and IaaS

1. Different users

SaaS model: Business sectors or individuals who are seeking to complete a business task without owning any IT equipment. For example, startups and small businesses tend to use SaaS apps because of the lack of time, capital, or expertise, or large companies seek short-term software. 

PaaS model: Companies that have efficient developers and deployers. They usually want to create customized applications and services to meet the needs of their customers. 

IaaS model: Most IaaS model users are system managers who want to create a platform for their service test, development, integration, and deployment.

2. Different cloud services

The cloud vendors will handle all of the tasks in the SaaS models, fewer in the PaaS models, but the least in IaaS models. To understand more about the relationships of the services offered by SaaS, PaaS, IaaS are offering to you, you can take a quick look at the diagram below: 

SaaS

Just imagine this. You want a new house. There are usually three options for you. The first option is the least time-consuming. You just buy a completely built house. You do not have to do anything. Everything you need to do is to pay, move into the house and start your life there. However, as the house was built by others, sometimes you may not be satisfied with some features of the house. It is just like the way you use SaaS applications. Some of the currently available SaaS services are Email, Office, Automation, CSR, website testing, Wiki, Blog, Virtual Desktop, etc. You do not need to manage anything when using these services. The cloud vendors will take care of the system management from A to Z. You just purchase the applications and get your tasks done. However, you may find some of the applications’ features not yet match what you desire due to the different needs of your business.

PaaS

The second option for you is that you have to design the house by yourselves, but someone else will gather all the needed materials, build the foundation of the house and build the rest for you. This time, you get a little more control over how your dream house will look like. However, you do not need to worry about how many bricks you are going to need. This is like when you use the PaaS model which can offer you greater flexibility and facilitation in operations. You are assisted with Service and application test, development, integration, and deployment, platforms on which you can build your own apps. You need to manage the data and the apps only.

IaaS

The third option is the toughest one for you. You have to start from scratch. Luckily, some people can get you all the bricks, cement, all other materials you need, and they are kind enough to help you finish the foundation of the house. But then, you have to take care of the rest. You have to design the house, build walls, build the whole house by yourself. The building materials, as well as the foundation here, represent what IaaS offers to you: Virtual machine, operating system, Message queue, Network, Storage, CPU, memory, and backup services. IaaS can give you the infrastructure of cloud-based technology, direct control over the IT operations so that you can start building your own platforms and everything else.

Advantages and Disadvantages of SaaS vs IaaS vs PaaS

Advantages of the SaaS: 

  1. Time-saving: As mentioned before, you just need a device and Internet connection to get access to the SaaS. Moreover, as the cloud vendors take charge of the management and maintenance process, SaaS services can save you from many working hours.
  2. Cost-efficient: A lot of costs including hardware, software license, and maintenance can be cut down due to multi-tenant cloud environments.
  3. Scalability: the pay-as-you-go model can facilitate the user experience and offer you flexibility. As the third party hosts the software, switching usage plans is hassle-free. 
  4. Customer-friendly: Saas applications are easy to use and equipped with the best practices. Moreover, you can test the software before purchasing. 

Disadvantages of SaaS:

  1. Data insecurity: Embracing the SaaS model also means that you let the third party keep your data, exposing your business to security risks. 
  2. Difficulty in Regulation Compromise: As your data resides in the vendor’s data center, it may be difficult for you to agree with the vendor in terms of protection terms and conditions as both parties have different interests. 
  3. Low Speed: As the software runs on the cloud, a distant data center, you may have to endure lower performance. 
  4. Lack of customization: SaaS apps have been completed in advance of the purchase, which makes cloud vendors hesitate to make adjustments as you request. 

Advantages of PaaS: 

  1. Cost and Time savings: cloud-based services save up costs and times from hardware/ software or maintenance. 
  2. More control over schedules: As your developers will create new apps for your business, you can adjust the speed of the app development process. 
  3. Customization: It is easier for you to make changes to apps to meet the demands of your customers. 
  4. Continuous updates: you can get automated updates and security patches from your vendors, minimizing incompatibility. 

Disadvantages of PaaS: 

  1. Data insecurity: Even though you can run your own apps, the data is stored in the third party’s cloud servers. There is still a level of data risks. 
  2. Requirement of coding expertise: your developers must be competent at coding to make the best out of PaaS. 
  3. Limitation in the operations: Some customization processes may not perform best on PaaS platforms, causing inconvenience to end-users.

Advantages of IaaS: 

  1. Operational Flexibility: IaaS is the most flexible cloud service model, allowing your employees to get access to hardware, computing power, and software applications used on a daily basis. 
  2. More Control: you can retain complete control of your infrastructure 
  3. Scalability: Speaking of industries suffering from seasonal fluctuations, IaaS is an ideal choice to adjust the data storage, virtual machine, or software app needs. 
  4. Cost savings: IaaS offers lower infrastructure costs, making IaaS appropriate for startups.

Disadvantages of IaaS: 

  1. Higher requirement of internal resources and HR training: As your company needs to be responsible for multiple tasks, the workforce must acquire skills to manage the infrastructure. Inhouse resources are also needed to maintain stable control over the infrastructure. 
  2. Data Security: Threats can still be imposed by the host or other virtual machines (VMs), or even the data communication exposure between the host and VMs. 
  3. Complicated legacy systems: incompatible infrastructure may fail to secure legacy apps.

Conclusion

If you are considering scaling up your business, moving your business to the cloud is of paramount importance to ensure facilitation in operations as well as improvement in data security. Especially when your company has unpredictable demands, bounded resources, or a small size team, cloud computing provides solutions to all your addressed concerns. The real question you need to ask yourself is not whether to perform cloud migration, but which types of cloud service models among SaaS, IaaS, and PaaS you should embrace into your business. 

Accounting Solution Hack Now Financial Accounting in Business

Financial Accounting as an Accounting Solution? 

Financial accounting is an accounting solution that undertakes the work of recording, synthesizing data, and building financial statements to serve those who need to use accounting information. Information on the status and fluctuations of capital, assets, or physical and monetary flows will be synthesized by a financial accounting team based on data.

The finance and accounting team will include general accounting and data accounting, with a clear and transparent division of work to ensure work efficiency, specifically:

  • General accounting: Collect and process general information about the economic and financial situation of the unit. Through monetary units, general accounting provides data reflecting the use of assets and sources of asset formation of the enterprise.
  • Detailed accounting: Collect and process information according to a specific object on each unit. In detailed accounting, accountants must ensure accuracy to avoid affecting when resuming the data.

Financial Accounting for Businesses

A financial accountant is one of the positions that play an important role in the business, supporting businesses to perform tasks such as:

  • Provides information for those who need to use accounting information such as business leaders, external partners. Therefore, all financial accounting data provided should ensure accuracy, objectivity, and compliance with accounting principles and standards, which is the basis for managers to make appropriate and timely business decisions.
  • The information provided by a financial accountant is information about financial-accounting activities that have arisen, of a general nature, expressed in the form of value. Therefore, businesses can regularly monitor the status of their production and business activities.
  • Makes general financial statements about the business’ performance results of in the reporting period, including clear financial results and effective cost management that help businesses optimize costs and cut unnecessary expenses.
  • Manages risk and insurance for businesses when there are financial fluctuations.
  • Supports business leaders to regulate the financial situation of the business. The information from the financial accountant is also a legal basis to help businesses clearly resolve complaints, disputes, bank loans and investments.

Important Principles to Remember

Financial accounting should comply with the general corporate accounting rules. For instance:

  • Assets and liabilities are initially recognized at cost
  • Consistently apply the selected accounting regulations and methods in each annual accounting period. If there is a change in the method, the accountant should make a detailed explanation in the financial statements
  • To reflect in an objective, factual, complete, and correct manner in the accounting period in which economic, financial, and accounting operations arise.
  • For the preparation and submission of financial statements, accountants must do so accurately and submit them on time. The information and data in the financial statements of the enterprise should be disclosed according to the provisions of Articles 31 and 32 of the Law on Accounting.
  • Accountants evaluate assets and allocate expenditures and receipts in a uniform, careful and accurate manner with no deviation.
  • Preparation and presentation of financial statements must reflect the true nature of each transaction rather than its appearance

Financial accountants need to make monthly, quarterly, and annual reports such as: 

  • Monthly report: Provide VAT report, PIT report
  • Quarterly reports: Provide VAT reports, PIT reports, reports on the use of invoices
  • Annual report: Financial report, PIT finalization, CIT finalization, license tax
  • Accounting book:
    • General diary
    • General ledger
    • Receivable and payable report
    • Consolidate inventory report
    • Management of cash receipts and deposits
    • Management of raw materials, goods, finished products
    • Manage business revenue and expenses

In addition, a financial accountant also performs other tasks such as announcing the issuance of invoices, checking payment papers, etc. 

Management Accounting vs Financial Accounting

ContentManagement AccountingFinancial Accounting 
Purpose Provide information to serve the management of production and business activities.Provide information for the preparation of financial statements. 
Target customerCorporate managers (Board of Directors, Board of Directors). Business managers and external entities (Investors, banks, tax authorities, financial authorities, statistical agencies).
Providing information principlesThere is no obligation, managers are free to decide and adjust in accordance with the needs and management capabilities of the business.Respect the generally accepted and used accounting principles. In other words, financial accounting must ensure consistency according to certain accounting principles and standards so that everyone has the same understanding of accounting principles. Accounting information, especially financial statements, and financial accounting must comply with the provisions of applicable laws, especially the requirements of financial management and the requirements of society through disclosure. mandatory data.
Information’s scopesRelated to the management on each department (workshop, department) to each relevant individual.Involves financial management on an enterprise-wide scale.
Report timelineManagement accountants have more reporting periods: Quarter, year, month, week, day.Financial accounting has a reporting period: Quarterly, annually.
Information featuresEmphasize the relevance and flexibility of data, information is aggregated from many different angles.Reflect past information that is objective and verifiable. 
Statutory CompulsoryManagement accounting is not mandatory.Financial accounting is required by law. It means that the books and reports of financial accounting in all enterprises must be unified.

For small businesses and micro-enterprises to set up a complete and effective accounting system is quite difficult because of resource and cost constraints. Therefore, choosing an accounting service provider is currently the optimal solution for businesses today. Enterprises do not need to spend too much on paying staff salaries, office rental costs, or recruiting full accounting positions such as financial accountant, chief accountant, tax accountant, but still have a reporting system of reports and books in accordance with regulations.

At Shoeboxed, we provide the best receipt tracking and management system. As accountants and business owners using the Shoeboxed system, there is no need to worry about manage paper receipts as well as extracting transaction details from these invoices. Sign up now to use Shoeboxed for free or reach out to our representative for a demo and customized business plan.