The actual process of keeping books is easy to understand when broken down into steps:
- Keep receipts and or other acceptable records of every payment and expenditure from your business.
- Summarize your income and expenditure records on a periodic basis (generally daily, weekly, or monthly).
- Use summaries to create financial reports that will provide specific information about the business. For example, how much monthly profit is the business making or how much the business is worth?
Bookkeeping and accounting functions of a business share two basic goals:
- To keep track of income and expenses improving chances of making a profit.
- To collect the necessary financial information about the business to file various tax returns.
Remind yourself of these goals whenever feeling overwhelmed by the details of keeping financial records.
Be reassured that there is no requirement that records are kept in any particular way. In other words, there is no official “right” way to organize the books. As long as the records accurately reflect business income and expenses the IRS will find them acceptable. Whether you do your accounting by hand, on ledger sheets or use accounting software, these principles are exactly the same.
Summaries of business income and expenses are the heart of the accounting process. Remember that each business sale and purchase must be backed by some type of record containing the amount, the date, and other relevant information about the sale or purchase.
From a legal point of view, the method of keeping receipts can range from slips kept in a box to a sophisticated cash register hooked into a computer system. You will, of course, want to choose a system that fits your business needs.
Setting up and posting ledgers:
A ledger is really nothing more than a summary of revenues and expenditures. Receipts are entered according to category and dates. Later these summaries will be used to answer specific financial questions about the business such as whether it is making a profit, and if so, how much.
If the company is not set up in financial software such as QuickBooks, you can start with a blank ledger page (a sheet with lines on it) or, an Excel spreadsheet with empty rows and columns. Enter data on a regular basis like every day, once a week, or at least once a month. It is best to transfer the amounts from receipts for sales and purchases into the ledger. This activity is called posting. How often receipts are posted depends on how many sales and expenditures the business makes and how detailed you want the books to be. For example, if you are doing hundreds of sales amounting to thousands or tens of thousands of dollars every day these should be posted daily.
To get started on a hand-entry system, get ledger pads from any office supply store or use Excel software. Alternatively, purchase an accounting software program that will generate its own ledgers as information is entered. All but the tiniest new businesses are well advised to use an electronic accounting software package to help keep their books.
Creating basic financial reports are important because they bring together several key pieces of financial information about your business. While the income ledger may tell you that the business brought in a lot of money during this year, there may be no way of knowing whether a profit was turned without measuring income against total expenses. This is why financial reports are needed in order to combine data from the ledgers and sculpt it into a shape that shows the big picture of the business.
If you are a start-up business or a business of 5 or more years and need assistance getting your data into financial reports give us a call for assistance. We have many packages large and small that support all types of businesses in different stages of development.