Down to the Basics of Bookkeeping
Many small business owners make a leap of faith by starting their business with no concept of accounting or bookkeeping. Often that deficiency makes keeping track of the business’s progress and finances overwhelming. It needn't be the headache it is often made out to be if you get down to the basics of bookkeeping and build on them.
Bookkeeping and accounting share two basic goals: to keep track of income and expenses, thereby improving your chances of making a profit, and to collect the necessary financial information about your business to file your various tax returns and other governmental reporting requirements. Sounds simple doesn’t it? In its most basic form it is.
So what are the steps of that basic form? Well, first and most important, you need to keep receipts or other acceptable records for every amount received or paid out by the business. Secondly, you summarize your income and expenditures on some regular basis, generally monthly. And last, you use the summaries to create financial reports that tell you specific information about your business. It does not matter if you use hand written schedules or use accounting software on the computer these basic steps apply.
For the key record keeping step, you may use a cigar box or an elaborate filing system but the critical point is a documentation of each transaction. For most payments a check is a good starting point but a detailed receipt or invoice should back it up. For money you receive, some type of documentation such as the invoice you presented to the customer or a sales receipt should describe the amount on your deposit slip. Speaking of checks and deposit slips – all receipts and payments of money should go through your bank account. When all else fails these bank records can be used for reconstructing your records.
For the summarizing step, a basic cash receipts journal and a cash disbursements journal will meet most of your core needs. These two summaries look somewhat like a check register with additional information regarding the account (or purpose) of the transactions. Ask your accountant to help you set up these basic journals. For a small number of transactions these journals are all you need and they can be done manually or in a computerized spreadsheet. For a higher number of transactions posting to a general ledger system is the next step up after your journals. This level of work is where basic accounting software begins to be beneficial.
For the reporting step, there are some standard reports such as a balance sheet and income statement that interpret not only how much you made but what you own and owe to operate your business. Again, your accountant can help you set up these items. What is the key report most owners want to see first though? Generally it is cash flow. In its simplest form the net of the totals from the cash receipts and disbursement journals will tell you if you have made positive or negative cash flow for the period just completed.
To get to projections of future cash flows you will need to start tracking accounts receivable and payable. To control costs you may want to track inventory. Because you hire employees you may have to start tracking payroll records. Once you take these steps above the basics then accounting software will be your best alternative. But – the core of this more detailed computer system is still the three steps to basic accounting. So now when you move to that magic-in-a-box called computerized accounting you will understand what the basic foundation is and can build on it.
Jim W. Norman, CPA is a principal with Norman, Johnson & Co., PA, a