Accounting & Bookkeeping

In bookkeeping, an accountant keeps a comprehensive record of how much your business owes creditors and how much is owed to you. The records of these transactions also indicate how much you have invested in equipment and inventory.

Accountants handling the books take care of accounts receivable and accounts payable, put together financial statements (such as balance sheets, income statements, and cash flow statements) and take care of bank reconciliation. The cost climbs as the volume of work expands. The more transactions and the more statements you expect your accountant to prepare, not to mention how often you want these financial statements whether they be monthly or yearly, the more you’ll pay.

Bookkeeping Tips (part 5)

Creating Basic Financial Reports

Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way: while your income ledger may tell you that your business brought in a lot of money during the year, you won’t know if you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time.

That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business. The key reports you need to create regularly are a cash flow analysis, a profit and loss forecast, and a balance sheet. (Both QuickBooks and Quicken Home and Business, as well as other accounting software, can provide these regular reports.)

Bookkeeping Tips (part 4)

Setting Up and Posting to Ledgers

A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you’re keeping track of (entered from your receipts according to category and date). Later, you use these summaries to answer specific financial questions about your business, such as whether you’re making a profit and, if so, how much.

Post receipts on a regular basis. On some regular basis — like every day, once a week, or at least once a month — you should transfer the amounts from your receipts for sales and purchases into your ledger. This is called posting. How often you do this depends on how many sales and expenditures your business makes, and how detailed you want your books to be.

Your posting schedule depends on your sales numbers. Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands of dollars every day should post daily. With that volume of sales, it’s important to see what’s happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day’s sales to a computerized bookkeeping system at the push of a button.

A slower business, however, or one with just a few large transactions per month, such as a small website design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.

If possible, use accounting software. You can purchase an accounting software program that will generate its own ledgers as you enter your information (and then automatically generate the necessary financial reports from the same information). All but the tiniest new business are well advised to use an accounting software package to help keep their books. Micro-businesses can get by with personal finance software such as Quicken.

Bookkeeper

A bookkeeper also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the “daybooks.” The daybooks consist of purchase, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct daybook, suppliers ledger, customer ledger, and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Bookkeeping Tips (part 3)

Basic Expense Accounts

Most businesses need to track the following expense accounts:

• payroll – this may include sub-accounts for a variety of deductions or additional expenses (wcb, insurance, etc) that are part of your payroll.
• Cost of goods sold – if you are a retailer, this is the cost of the items you bought for resale. If you are a manufacturer, this is the final cost of items that you completed making and sold to your clients (wholesale or retail).
• Office expenses – paper, pens, ink, postage, etc.
• Telephone
• Rent
• Bank Fees
• Utilities
• Insurance
• Advertising
• Automobile

Many businesses have nothing more than this. If your business is more complex, you might have items such as materials (if you manufacture something, including construction businesses), supplies (products consumed in making your items for sale, but that are not part of those items – in construction this includes such things as cleaning supplies for the sites, for other businesses this is often included in office supplies), security (alarm systems, etc.), interest expense, amortization, meals & entertainment, training, travel, storage, and more. Always consult with an expert if you are not sure.

Liability Accounts

Most businesses also have liabilities. These are the accounts payable to their suppliers and other creditors. Whenever a liability is entered, be sure to enter the opposing side of the entry to show where the money went (such as when a bill is entered, the one side of the entry is to accounts payable, and the other side is to the cost of whatever was bought). If you are entering loans, be sure to enter the bank account entry and the opposing entry against/to the loan.

Bookkeeping Tips (part 2)

• Use Quick Books. Inuit owns 80% of the small business accounting software market and for good reason. Their software is easy to learn and easy to use. Within a few hours after installing you can be producing your own professional financial statements. It is the software I use for my own accounting/tax business and also what I use to produce client Financial Statements and Payroll Reports.

• Avoid Cash. I can tell you the easiest way to get into hot water with the IRS is to pay for things with cash and then not have a receipt. For many of us we are in a habit of using cash from the time we were kids. For your own business though, you need to avoid cash.

• Deposit All Your Income. It is very tempting to withhold cash from your business receipts but I advise you do not. Instead be aggressive with your expenses. If you are in an industry where cash deals are common the IRS will look for evidence of cash deposits in your checking account. If they are absent you will have a lot of questions to answer.

Accounting and Bookkeeping Basics

Bookkeeping and accounting share two basic goals:

• to keep track of your income and expenses, thereby improving your chances of making a profit
• to collect the necessary financial information about your business to file your various tax returns and local tax registration papers

Sounds pretty simple, doesn’t it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records. Hopefully you will also be reassured to know that there is no requirement that your records be kept in any particular way. (There is a requirement, however, that some businesses use a certain method of crediting their accounts. See “Cash vs. Accrual Accounting.”) In other words, there’s no official “right” way to organize your books. As long as your records accurately reflect your business’s income and expenses, the IRS will find them acceptable.

The actual process of keeping your books is easy to understand when broken down into three steps.

1. Keep receipts or other acceptable records of every payment to and every expenditure from your business.
2. Summarize your income and expenditure records on some periodic basis (generally daily, weekly, or monthly).
3. Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you’re making or how much your business is worth at a specific point in time.

Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.

Bookkeeping Tips (part 1)

1. Use the right accounting system. Most businesses use either cash-based or accrual-based accounting. If you use the cash method, you count income when you receive it and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, not when you actually receive or pay them.
   In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. In these cases, the accrual method might be a better choice for your business. And in fact, if your firm has more than $5 million in sales or keeps an inventory, the IRS might require that you use the accrual system. In other cases, however, the simpler cash system could be all you need.
2. Maintain daily records. This is one of the most basic rules: If you don’t keep accurate daily records, you don’t have an accurate way to track the financial condition of your business. Different people use different record-keeping systems; what matters is that you have one and use it every day. Once you have a good system set up, accurate record keeping will take just a few minutes a day.
3. Handle and review checks carefully. It’s easy to be on autopilot when you’re writing checks and tossing canceled ones into a filing cabinet without reviewing them. Remember: Those checks are as good as cash. And if something goes wrong, you — not the bank — will be on the hook.
   Take the same care with checks as you would with cash. Sign checks using a clear, distinctive signature that won’t invite forgery. Review canceled checks before anyone else, including your bookkeeper or employees, sees them; that way you can catch unauthorized checks. And if your business is a partnership, it’s a good idea to have at least one of the partners co-sign the checks.
4. Get a bank statement with a month-end cutoff. This is another basic tip that can reap big rewards. Synchronizing your bank statement with other monthly records will make it much easier to reconcile your statement and track expenses.
5. Leave an audit trail. Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company’s financial activities. This means keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping separate bank accounts for your business and personal funds. If you can’t go back a year and reconstruct your company’s finances, you probably aren’t leaving an effective audit trail.
6. Use a computer. Computer bookkeeping software is absolutely essential for all but the smallest businesses. These applications make it easy to track income and expenses, prepare tax documents, summarize your company’s financial activities and back up records for safekeeping. If you’re working with an outside bookkeeper, make sure they know how to use a computer.