Background

Voters in State of Arizona passed proposition 203, enacting legislation defined as Arizona’s Medical Marijuana Act. The Medical Marijuana Act authorizes the establishment of nonprofit medical marijuana dispensaries (“dispensaries”). These dispensaries are to be licensed, tightly regulated, and inspected and are intended to provide medical marijuana to qualified patients, with their doctor’s approval, or their designated caregivers.

Arizona’s Medical Marijuana Act is governed under Title 36, Public Health and Safety, Chapter 28.1 – Arizona Medical Marijuana Act. Arizona’s Department of Health Services (“DHS”) has enacted “draft” rules governing the program which are contained in Title 9, Health Services, Chapter 17, Department of Health Services – Medical Marijuana Program.

Draft rules issued by DHS contain regulatory requirements over the financial accounting operations of all dispensaries. The draft rules require financial accounting submissions to DHS to be in accordance with Generally Accepted Accounting Principles (GAAP), specifically defined in R17-101 – Definitions. DHS rule R9-17-315 requires an inventory control system and monthly internal audit(s) of the dispensary’s inventory in accordance with GAAP. The draft rules also require annual financial statement audit conducted by an independent Certified Public Accountant. The requirements are contained in R9-17-307(3) and (4).

Our goal is to provide general guidance to entities that are anticipating submission of an application and receipt of an Arizona medical marijuana dispensary license. Due to the anticipated changes in the draft rules as a result of the public meetings and comment occurring during February, 2011, the likelihood of additional or amended final rules should be anticipated.

Small Business Accounting System

Many new small business owners and entrepreneurs consider accounting and bookkeeping, a necessary evil; forced upon them by various federal, state and local governments. In this case, an Arizona Medical Marijuana dispensary’s perpetual existence will be closely related to how well the accounting system provides Arizona’s Department of Health Services the financial accounting information they require.

Accounting is an essential component of business, and evil or not, it is a critical business function that cannot be avoided. Remember, noncompliance with statute and regulation will eventually collapse an entity, with an entity’s officers possibly being subjected to civil fine(s), penalties and forfeitures. The accounting system is how a business tracks assets, liabilities, equity, revenues and expenses as a mechanism to evaluate if the company is financially successful. A well designed accounting system is:

Organized set of computerized and manual accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions.

It is an information system that should be embraced by small business owners and entrepreneurs as a means of providing a “snapshot of the business”, through the production and analysis of periodic and timely prepared financial statements. It’s also one of the most important management decision making tools used in any business.

Accounting System – Practical Considerations

There are different approaches that can be taken to set up an accounting system.

  • Perform your own bookkeeping and let an accountant prepare financial statements and tax filings
  • In source an accountant to work part or full time to do both bookkeeping and statements
  • Outsource to a bookkeeping service that maintains records and inputs data into an accounting software program and an accountant prepare the statements
  • Subcontract only one portion of the accounting system such as payroll while records are maintained within the business and an external accountant prepares the statements
  • Assemble your own supporting records but let a bookkeeping/accounting service do the actual data input and an accountant prepare statements

This is not an all-encompassing list, but is intended to only provide ideas of the various arrangements that can be established. Generally, most new small business owners do their own bookkeeping and let an accountant prepare financial statements and the related federal, state and local tax returns.

One of the main reasons business owners maintain their own bookkeeping systems is they need to know every day where the business stands financially. The following financial metrics assist owners and management in:

  • Monitoring the financial condition of the business
  • Identifying and resolving problems that arise
  • Controlling expenses
  • Evaluating profitability
  • Establishing a budget
  • Assuring accurate record keeping
  • Managing accounting fees and expenses

The business owner(s) are the individual(s) ultimately responsible to government regulators, banks, and private lenders for the accuracy and completeness of the financial accounting records.

Accounting Software

Hopefully, with your small business’s growth, you will eventually notice that at some point you will need an accountant unless you happen to be a Certified Public Accountant (“CPA”) starting a new accounting business. That is why a CPA should be included on the business team during the pre-incorporation phase; before the entity is even up and running.

In the not-so-distant past, most small businesses used manual bookkeeping systems and made hand written general ledger and subsidiary entries in ledger books. Today, with the proliferation of computer based accounting software it is no longer necessary and it is not advisable. Even the smallest new business should take advantage of inexpensive bookkeeping and accounting software that is available.

The software systems today offer tremendous functionality and services needed to properly manage a business no matter how small it may be.

  • Subsidiary ledgers for tracking specific revenues and expenses
  • General ledger summary accounts
  • Payroll
  • Checking details
  • Bank account reconciliation
  • Sales figures
  • Loan tracking
  • Purchasing
  • Shipping and inventory systems
  • Asset tracking
  • Financial statements (monthly and annual)
  • Income tax reporting
  • Special reports as needed such as revenue or expense trend

Choosing the Appropriate Accounting Software Package

There are numerous comprehensive accounting packages for small businesses which are affordable and easy to use. The following list represents several of the most popular programs:

  • Intuit’s Quickbooks
  • Sage Peachtree Complete Accounting
  • Cougar Mountain
  • Microsoft Dynamics

There are many software products that are well tested and able to be integrated with other products such as inventory management and Microsoft Excel. In addition, you need to consult carefully with your accountant and look ahead to the days when your small business will expand to the point you will need sophisticated add-ons such as point-of-sale or comprehensive job costing.

Many of the most popular small business accounting packages can be easily expanded to integrate additional functions. For example, you can add a point of sale system that will automatically feed sales figures to the sales, accounts receivable subsidiaries and general ledger functions. Arizona dispensaries will be required to deploy a product inventory system that includes order and shipping features.

Making Your System Work for You

A good accounting system should have certain qualities in order to be most useful to the small business owner.

  • Software should be relevant to the business; i.e. cost accounting for a manufacturing
  • Software should produce accurate information
  • Accounting system should be user-friendly
  • Accounting system should produce everything needed for preparation of accurate tax statements

There are many learning tools available today and all programs come with tutorials. Classroom instruction or attending your chosen software vendor’s sponsored seminars is critical in keeping your system relevant, up-to-date, and functioning properly.

About the Author

Lance Meilech is a Certified Public Accountant practicing with the firm of AddingMachine.com in Phoenix. He has earned a Masters in Taxation and has been licensed as a CPA in Arizona since 2004. As a licensed professional, he provides a full range of accounting and tax services, including accounting and tax services for Arizona medical marijuana dispensaries. However, neither this article nor the author purport hereby to offer legal, tax or accounting advice in any form. This article is not a comprehensive assessment of issues that might be experienced in a particular business operation. Each reader’s situation is dependent on his/her facts and circumstances. As a result, each reader should consult his or her own advisor for information concerning his or her specific situation or may contact the author at [email protected].  Call Lance at 602-943-2060.