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Bookkeeping Basics
Despite
the importance of bookkeeping, small businesses often neglect it because of the
time and effort it takes to set up and tend to a bookkeeping system. Most
business owners would rather be out generating sales than sitting in the office
making journal entries or entering debits and credits in their general ledgers.
But bookkeeping is one thing you can't afford to ignore. To understand why, it
helps to comprehend what bookkeeping is and how it affects your business.
Bookkeeping is the recording of a business's financial transactions. It's the
first step of the accounting process, which also includes classifying, reporting
and analyzing financial data.
Bookkeepers are responsible for organizing and tracking receipts, canceled
checks and other records generated by financial transactions. Bookkeepers
chronologically record all transactions — cash disbursements, cash receipts,
sales and purchases, and others — in a journal and post the journal entries to a
general ledger of accounts, which accountants use to prepare monthly financial
statements.
Although bookkeeping doesn't contribute directly to your profits, there are
several good reasons to maintain balanced books:
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Lenders and investors want to see accurate and complete books for a business
before granting loans or raising capital for it. If you rely on outside
financing, this is the most important reason to invest time and money in
bookkeeping.
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Bookkeeping generates the information you need to manage your company. For
example, up-to-date general ledger information shows which customers are past
due on their accounts or have outstanding balances on lines of credit.
Financial reports help you assess whether or not gross profits and expenses
are in line with your budget and projected net profits. In other words, these
reports help you anticipate and avoid cash-flow problems.
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In
order to know how much you owe the IRS, you need an accurate picture of your
company's income. In addition, keeping receipts and canceled checks will back
up whatever deductions and tax credits your company takes. Without good record
keeping, you leave yourself exposed to fines and penalties if you get audited. |
Bookkeeping Options
Many businesses hire an accountant or a bookkeeper to maintain their
books. But if you can't afford to or don't want to hire an accountant, you can
learn the basics by taking a bookkeeping class at a community college or small
business center in your area.
One of the first decisions to make is whether to use a manual or computerized
bookkeeping system. Generally only the smallest companies use manual systems and
make entries to ledger pads. Most companies use desktop accounting software.
These programs make it easy to set up accounts, post entries and generate
financial statements, do not come with source code. With source code you can
customize your software to meet your needs.
Online accounting solutions are another option. Internet-based accounting
solutions allow multiple users to access company records from any computer with
an Internet connection. When you use an online application, you contract with
another company to keep your financial data on its secure servers. You access
your records online by entering a password, and the service provider is
responsible for providing the software, security and data storage. The problem
with online accounting solutions is what happens if you cannot get to the
internet.
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