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Bookkeeping
Many small
business owners would rather focus on making sales than keeping track of them.
But a good bookkeeping system is essential to maintaining a profitable business.
Besides, it is required by law and is an excellent business management tool.
The Temple
Public Library has a number of publications available to better acquaint you
with the accounting and bookkeeping systems available. We also recommend meeting
with Temple Business Incubator to determine your individual bookkeeping needs.
If necessary, we will refer you to an accountant for further assistance. Contact
us for more information.
Recording
Transactions
Keeping Track of Accounts
Some Common Accounts
Internal Control
Storing Financial Documents
Other Components of a Good Record Keeping System
Recording
Transactions
One of the first decisions you need to make is what method should be used to
record transactions. There are two basic methods: cash basis and accrual basis.
Cash
Basis
The cash
basis records income when the money is actually received. This means you may
have actually sold the item a few days ago, but the transaction would be
recorded when you deposited the check. In addition, expenses are recorded when
they are paid, not when they occur. For example, you would record April's
utility bill in May when it is paid.
Sole
proprietors who have no inventory primarily use the cash method. Usually these
are small, service businesses that deal mostly with cash. The advantages of
this method may make it desirable from a tax standpoint. In the first year of
business, expenses may be recorded right away, while income can be put off
until the next year.
Accrual
Basis
The
accrual basis must be used if your annual sales exceed $5 million and your
business is structured as a corporation or if you handle inventory. With this
method, income and expenses are recorded as they occur, regardless of whether
or not cash has been exchanged. For example, if you make a sale on credit,
you'll record that income the same day, even though you may not receive the
funds for 30 days. Likewise, an expense is recorded the same day materials are
ordered, not when the check is written for them.
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Keeping
Track of Accounts
Each business needs to develop a chart of accounts. This is simply a list of
your business's accounts that is used to record and follow specific entries.
You'll need to assign numbers to each account for easy identification. Usually
an account number will consist of three or four digits.
Some
Common Accounts
Accounts
Receivable
Accounts
receivable tracks who owes you how much and when it is due. Usually this
system is automated if you sell to a number of different customers. A
bookkeeping software system will allow you to track accounts receivable data
to specific customers to ensure that billing and collection are done properly.
Accounts
Payable
Records
of how much you owe to others are kept in accounts payable. Each time you make
a purchase you'll need to include an entry in this account. A good automated
accounts payable system will alert you when to pay your suppliers.
Inventory
The
account that allows you to keep track of merchandise and equipment is an
inventory account. Analyzing this account can tell you which items sell well,
when to order more supplies, and other important information. Keep in mind
that maintaining the system should not outweigh the potential for loss. A good
system should:
- Prevent,
reduce or at least record losses.
- Assist
in buying decisions by showing the fast moving and out-of-stock items.
- Help
in planning sales events by showing amounts and acquisition dates of
overstocks.
- Keep
track of customer owned or consignment merchandise.
- Provide
periodic totals of merchandise between physical inventories.
Fixed
Assets
Fixed
assets are items that are for long-term use, generally five years or more.
Examples include vehicles, land, machinery, and buildings. These items are
expensed, or depreciated, over the period of time that they are used. There
are several different ways to calculate depreciation, so discuss with your
accountant which method is right for your business.
Payroll
Payroll
accounts contain the salaries and wages payable to employees. Federal and
state laws regulating payroll can be very confusing. Because of this, many
small business owners choose to use outside payroll services. If you decide to
do your own payroll, there are many software systems out there to assist you.
For each
employee, the business should maintain a file including the application form,
W-2 withholding statement, I9 form, medical records, insurance forms,
emergency phone numbers, etc. Payroll records are extremely important. Each
hourly employee should fill out a time card to verify compliance with minimum
wage laws, overtime requirements, etc. The owner should also maintain a record
sheet for each employee showing the weekly hours worked, gross pay, deductions
for state and federal income tax, FICA withholdings and the net pay. In
addition, the employee must be given their information. Most business
checkbooks include an extra stub or carbon copy for the employee to keep. The
payroll record should be set up so the owner can figure quarterly payroll
totals for reporting purposes.
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Internal
Control
When setting up a bookkeeping system, you'll need to state what procedures are
required in recording transactions. Precautions such as these will protect your
company from employee theft and embezzlement. Some suggestions for internal
control are:
- Set up
an internal control policy and have all employees read it upon hiring.
- Review
the policy on a regular basis to make sure it's up-to-date. If you need to
make any changes, hold a meeting to notify employees.
- Make
sure all employees take at least 1 week of vacation each year. This is often
when embezzlement is discovered.
- Train
others in the company to handle bookkeeping duties in case regular staff is
out of the office.
- Perform
background checks before hiring employees.
- Have
checks and balances: one person for accounts payable, another for issuing
checks, etc.
- Have
your accountant perform unannounced audits.
- Be
careful who you hire as an outside financial service provider.
- Back up
computer information.
- In the
early stages of the business, be able to monitor much of the cash-control
procedures yourself.
Storing
Financial Documents
It is important to keep financial records in case you ever need to refer to them
for tax reasons or other purposes. Below is a list of recommendations regarding
how long each type of document should be kept.
Indefinitely
- Income
tax reports, protests, court briefs, appeals
- Annual
financial statements
- Books
of account, such as general ledger
- Income
tax payment checks
- Documents
substantiating fixed-asset additions and depreciation policies
- Corporate
documents, pension records, labor contracts, and license applications
6 years
- Canceled,
payroll, and dividend checks
- Bank
reconciliations, voided checks, check stubs, and check register tapes
- Sales
records such as invoices, monthly statements, purchase orders, etc.
- Purchase
records, including purchase orders and payment vouchers
- Travel
and entertainment records
- Personnel
and payroll records
3 years
- Monthly
financial statements
- Subledgers
Important
documents such as these should be stored in a fireproof safe. You may also want
to consider keeping them in a location other than your main place of business to
prevent employee theft. Another thing to consider is storing your documents on
disks. This minimizes the mess involved in storage and may help you find records
more quickly.
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Other
Components of a Good Record Keeping System
A
Business Checking Account
Canceled
checks stapled to original invoices are the best proof of business
disbursements. If the owner deposits the business receipts, intact, each day
at the bank, they can construct a replacement set of records in case the
original records get burned or lost.
Bank
Account Reconciliation
The bank
will provide a monthly listing of deposits, checks cashed and the remaining
balance of the account. This should be compared with internal records to
detect errors, record bank charges and locate any "lost" checks.
Sales
Records
Whether
the business uses a cash register or hand-written multi-copy sales slips,
there should be a system that will allow classification of sales transactions
by department or merchandise line salesperson (for evaluation or commission
payment), taxable vs. non-taxed items and cash sales vs. charge sales. In some
cases, the owner might even want to record markups, discounts, or the gross
profit on each sale, and be able to pull out such things as transportation,
warranty work, service charges, etc.
Cash
Receipts
The cash
taken in each day will be a combination of that day's cash sales plus payments
for prior sales (charges), deposits on future sales (lay-by or special
orders), and miscellaneous income such as rental income, interest income,
commissions, loans or an increase in the owner's investment. The owner should
design a daily summary of cash receipts form to be completed and stapled to
the sales slips or register tape for each day to backup the bank deposit.
Cash
Disbursements
These
should be entered in a journal with sufficient columns to categorize and total
the major expense classifications.
Record
of Business Assets
A file
should be kept on each major item in the business to safeguard such things as
purchase or title documents, warranty or guarantee statements, and repair
records
Insurance
Records
Each
business may have several different types of insurance policies. These should
be kept in a safe place and the owner should also make a list of the policy
numbers, coverage's, and premium due dates. This list should be reviewed at
least once each year with the insurance agent.
Petty
Cash Account
In most
businesses the owner will have occasional small disbursements that are more
simply paid in cash than by writing a check. A check may be written to petty
cash and the money retained in an envelope. As the owner spends the money,
receipts should be put in the envelope and the amounts written on the front.
When the cash balance approaches zero, another check should be written and the
total balance carried to a new envelope. The envelopes should be saved to
justify tax deductions.
Auto
Records
The
owner must keep complete records of the number of miles that each car is used
in business (total mileage for the year) and the amount spent on gas, oil,
tools, tires, depreciation, licenses, garage rent, parking fees, repairs,
insurance, lease fees and rental fees. The costs can then be deducted in one
of two ways:
- Determine
the percentage that business miles were of the total driven and multiply
the total of the above costs by the percentage, or
- Multiply
the first 15,000 business miles by the appropriate rate provided the owner
owns the car, does not use the car for hire (taxi) or does not operate a
fleet of cars using two or more at the same time.
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This
information is taken in part from Start Your Own Business, by Rieva
Lesonsky and the staff of Entrepreneur Magazine. Published by Entrepreneur
Media, Inc., 1998, in Irvine, CA.
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