Bookkeeping and Accounting Basics

By Timothy J. Morgan Selected from FindLaw


While keeping track of your business's finances may seem overwhelming, it's not that hard when you know the basics of accounting and bookkeeping.

Bookkeeping and accounting share two basic goals:

* To keep track of your income and expenses, which improves your chances of making a profit.
* To collect the financial information necessary for filing your various tax returns.

Sounds pretty simple, doesn't it? It can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records.

There is no requirement that your records be kept in any particular way. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable. (There is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. )
Three Steps to Keeping Your Books

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 by your business.
2. Summarize your income and expenditure records on some periodic basis (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.
Step One: Keeping Your Receipts

Each of your business's sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. You'll use these to create summaries of your transactions.

From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you'll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be.
Step Two: 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'll use these summaries to answer specific financial questions about your business, such as whether you're making a profit and, if so, how much.

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.

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 or tens of 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.

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