ArticlesBookkeeping basics for your business - Article 1
Many of small business owners would rather focus on making and selling their products than on keeping their books and records. However, bookkeeping is just as important as marketing and doing business.
Many a great business ideas has failed due to a poor bookkeeping system. And ultimately, won't be keeping up if money going out is more than money that is coming in.
Apart from business owners desire to stay in business, two other reasons why book keeping system is most important are:
1. Legal requirement.
2. Bookkeeping records are an excellent business management tool.
Good basic accounting system will provide useful information that will enable you to run your business proactively rather than reactively when it comes to important financial decisions.
Many of business still operate using checkbook and receipts. It’s more efficient to go with an automated system, and there are now many bookkeeping software packages on the market. Most of the account software systems don’t require CPA to operate and interpret it. Most of the windows account software is very user friendly.
Most business use one of the two basic accounting methods in their bookkeeping systems: Cash basis and accrual basis. Cash basis is the simplest one between the two and is used for small business. Income is recorded when it is received, and expenses are reported when they are actually paid. From tax point it is sometimes advantageous for a new business to use the cash basis accounting.
With accrual method, income and expenses are recorded as they occur, regardless of whether or not cash actually changed hands. Credit sales are excellent examples of this. How to decide which book keeping system should use? Auditor is best source to do that. The accrual method is required if your business sales exceed $5 million and your business is structured as corporation. Business with inventory must use this method. This is highly recommended for any business that sells on credit, as it more accurately matches income and expenses during a given period. Where as cash basis is may be appropriate for a small, cash basis business or a small service company.
Accounting system has the following key components:
1. Chart of accounts.
2. General Ledger.
3. Accounts receivable.
4. Inventory.
5. Fixed asset management.
6. Accounts Payable.
7. Payroll.
This is the first article in the series of articles which explains the need for bookkeeping for any business to run effectively. This article explained the basic of accounts, Account system components.
Second article explains Account key component definitions. What is cost of accounting? As a manager of business what precautions should be taken to avoid employee theft?
More details on:
- General Ledger entries.
- Accounts payable and Sample
- Accounts receivable and sample.
- Requirements from IRS on bookkeeping.
Third Article describes in detail about creating financial statements [Income statement, Balance sheet, Cash-flow statement. Cashflow statement analysis] with samples. Stay tuned for the 2nd and 3rd Article in the coming weeks.
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S.V Bharath Reddy , is one of the founders of The Cashflow Crunchers, a web site for Investors and Smallbusiness to share investing tips and other information. For more articles, tips, and free online calculators, please visit http://www.cashflowcrunchers.com
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