The Importance Of Proper Bookkeeping/Accounting To Small Business Owners


Author: Christopher Onate

Proper bookkeeping is important to sustaining and expanding a business. Without it, you run the risk of hitting cash flow crunches, wasting money, and missing out on opportunities to expand. When you are devising or revising your bookkeeping routine, remember that the purpose of bookkeeping is to help you manage your business and to enable tax agencies to evaluate your business activity. As long as your bookkeeping achieves both of these objectives, it can - and should - be as simple as possible.

The general guidelines here outline what you must take care of and provide ideas for how to keep your books in an orderly manner. But before making any decisions regarding bookkeeping, check with your accountant or tax preparer because bookkeeping needs vary dramatically by business.
Many small business owners choose to use software to keep track of various aspects of their business, and resources are provided here to help you institute computer automation.

The key to taking full advantage of bookkeeping software is to determine if it saves you time and frees you up to concentrate on running your business. In many cases it will, but be careful not to fall into the trap of wasting time setting up computer bookkeeping that could be more efficiently handled on paper. The paper bookkeeping forms mentioned here can be obtained from most stationary stores.

Some bookkeeping functions are best relegated to an accountant.
While it is essential to retain a thorough knowledge by reviewing your books frequently, an accountant or bookkeeper can free you up to concentrate on expanding your business. Even a bookkeeping task that takes only a few hours a week may be better relegated to someone else if that time can be better spent.

Revenues and Expenses
Your business will use either a Revenue and Expense Journal or a Ledger to keep track of how much money is going out, where it is going, and what is coming in.

A Revenue and Expense Journal is used by most small businesses and is single-entry accounting -- recording receipts and expenditures only. Double entry accounting involves a ledger and necessitates that each activity be recorded as a debit and a credit on your books. In the past it was thought that all businesses needed to use the more cumbersome method of double-entry, but the single entry system is now used for many small business owners. Single-entry accounting can be kept on paper or computer. Programs that perform single-entry accounting include Quicken by Intuit and Microsoft Money among many others.

A ledger is used to record every transaction twice based on the idea that each transaction has two halves that affect your business. For example, if you sell an item, your books would reflect a decrease in inventory (a credit) and a inflow of payment (debit). If you use double-entry accounting you may want to use a computer program or a bookkeeper to keep your ledger up to date. If you allow anyone else to keep your books be sure you review them regularly. Programs that do double-entry bookkeeping include: M.Y.O.B by Teleware, Peachtree Accounting by Peachtree Software, and Quickbooks by Intuit.
Your accountant can advise you on which type of recordkeeping you should choose. Also consult your tax advisor about whether you should use a cash or accrual-based bookkeeping system.

Cash Expenditures
Cash spent in your business needs to be accounted for if you want to record all business expenses in a given year. There are at least two ways to do this: write yourself reimbursable checks or keep a petty cash record.
If you choose to pay yourself back with a check, simply keep track of all cash receipts and total them weekly, biweekly or monthly, depending on your volume of expenses. Keep a log of each category of expense, for tax purposes and write yourself a check for the total. Write cash reimbursable in your check register to differentiate this from taxable income. Alternatively, you can keep a petty cash record by writing a check to petty cash and keeping a log of each expense paid out of petty cash.

Inventory Records
Keeping on top of your inventory records will enable you to prevent pilferage, keep inventory holdings to a minimum, and track buying trends, among other things.
If you sell a large number of small-ticket items -- for example, as in a stationary store -- you might want to use a computer system to track inventory or tie your computer system into your sales by having a POS (point of sale) inventory system. If you sell larger ticket items you may be able to do it yourself on paper.
The crucial inventory information you need to capture is: date purchased, stock number of item purchased, purchase price, date sold, and sale price.

Accounts Receivable
If your products or services are paid for at time of delivery, you will not need an accounts receivable tracking system. However, if you provide services or products for which people pay you at a later date, your accounts receivable records keep track of what is owed to you. You can monitor accounts receivable by holding on to a copy of all invoices sent out or by keeping an accounts receivable record. Either way, the information you need to capture includes: invoice date, invoice number, invoice amount, terms, date paid, amount paid, and the name of the entity being billed.

Many software programs are available to help you generate invoices and track hours and expenses incurred for each client. These programs can save hours of time for a business owner and create professional-looking invoices. But, according to Ed Slott, author of "Your Tax Questions Answered", (Plymouth Press) keeping your accounts receivable on computer is sensible if it enables you to collect payment more quickly or get a better handle on where your money comes from. Otherwise a paper system is very effective. Software programs that will create invoices or track hours include: QuickInvoice by Intuit software; Timeslips and WinInvoice by Good Software; and PerForm Pro Plus from Delrina.

Accounts Payable
Accounts payable are debts owed by your company for goods and services. Keeping track of what you owe and when it is due will enable you to establish good credit and hold onto your money as long as possible.
Business owners with few accounts payable items use accordion file folders labeled with dates to keep track. Other small firms simply pay bills twice per month and keep all bills in a "To Pay" folder. Larger companies use accounts payable paper records organized by creditor. Regardless of the system you choose, you should retain the following information about accounts payable: invoice date, invoice number, invoice amount, terms, date paid, amount paid, balance (if applicable), and clients names and address.

About the Author

Christopher Onate is an undergraduate, Department of Business Administration, Usmanu Danfodiyo University Sokoto. He is the Founder of KrisTon Small Business Consultant. He is a Small Business Consultant and loves writting about business and personal success.


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