Bookkeeping and accounting are terms that are often confused. Even though they have slightly different meanings, they share two basic goals when it comes to a business’ finances:
- to keep track of your income and expenses, in order to improve your chances of making a profit
- to collect the necessary financial information about your business to file various tax returns and local registration papers
These two basic goals can serve as the starting point for cleaning up your records. Rather than getting overwhelmed by the details of financial management, sort through your books and keep the information that will contribute to the keeping track of income and expenses. There are no requirements to keeping your records a certain way; however, organizing your books with these two goals in mind will keep you sane when trying to find important information. As long as your records accurately reflect your income and expense management, the IRS will find them acceptable.
The process of keeping your books is actually an easy process to grasp; you just have to know what it is your books need to be focusing on. Whether you do your accounting by hand on ledger sheers or use accounting software, the following principles will help you clean up your books:
- Keep receipts or other acceptable records of every payment to and every expenditure from your business. The accounting process requires that you keep comprehensive summaries of your business’ income and expenses. These summaries, however, cannot just be created. Each sale and purchase must be backed by a record containing the amount, date and other relevant information regarding the sale.Legally, there is not right method to keeping your receipts. Whether you store your receipts in a box or electronically is up to your business. You just want to be sure that the system you choose fits your business needs. Smaller businesses may get by with a “bare-bones” approach; however, larger businesses need a better receipt filing system as they handle more sales and expenditures. Choose a filing system, or adapt a current one, to meet your needs.
- Summarize your income and expenditure records on a regular basis (generally daily, weekly or monthly). Start by setting up and posting ledgers. A ledger is a summary of revenues, expenditures and everything else your business is keeping track of (entered from your receipts according to category and date). These summaries will answer specific financial questions about your business, such as whether or not you are making a profit and, if so, how much.If you do your accounting by hand, you will start off with a ledger sheet. If you electronically keep track of your books, your ledger sheet will be a computer file of empty rows and columns. On a regular basis, you should transfer, or “post”, the amounts from your receipts to the ledger. How often you do this will depend on how many sales or expenditures your business makes or how detailed you wish your books to be. The more sales you do, the more often you should post to your ledger. It’s important to see what’s happening everyday and not fall behind when your business generates a high volume of sales.
- 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. Financial reports are important to the health of your business. Reports bring together key financial areas of the business and give an insight into how well, or poorly, the business is performing. Your ledger may tell you that your business brought in a substantial amount of money, but until you measure that income with your total expenses, you will have no way of knowing whether or not you made a profit. Financial reports combine the data from your ledgers and form it into a comprehensive picture of your business.