Small Business Book Keeping

Small business book keeping — or to be more grammatically correct, small business bookkeeping — is an essential skill to be mastered by every small business owner.

You're in business and things are hopping. Orders coming in... clients being served... invoicing, deliveries... bookkeeping? Later!

With hundreds of transactions each year, imagine how many receipts, invoices and other source documents your business can accumulate. Some people file them regularly and diligently, so they can refer back as they track their progress. Others don't.

Running a business is like juggling, and small business book keeping is the balancing act. It's a systematic way to organize financial information so you can actually use it in your business.

Decisions and Results...

Business activity is about decisions and results. Just as every action causes a reaction, every business decision causes a result, moving dollars out of one area and into another.

Each transaction is represented as a debit and a credit. When all transactions are double-entered this way, total debits will equal total credits.

There should be no mystery about debits and credits. It's a simple way to cross-reference your activities so you can balance your books.

Small Business Book Keeping Tactics

Transaction details are first listed in Journals, as they happen, by date. This includes both debits and credits. A journal is like a diary, tracking your business activities, transaction by transaction.

But a daily journal is not much help if you need to know how much you've spent on office supplies... or what's owing on a particular account. For this information, you need to group transactions by account - like sales, car, rent, insurance, and so on.

You'll need a Chart of Accounts - a list of accounts for your business.

There are five account types:

1. What you owe - bank loans and payables (Liabilities)
2. What you have - retained earnings and shareholder loans (Equity)
3. What you sell - sales and rental income (Revenue)
4. What you need to operate, like rent, office supplies, utilities... and don't forget your accounting fees! (Expenses)

Phase 2 of Small Business Bookkeeping - Ledgers

Once you have Journals and a Chart of Accounts, you're ready to move into the next phase of small business book keeping... ledgers.

The General Ledger, or GL, contains an individual record for each account - a summary of all transactions by category.

Each journal entry is transferred, or posted, to the related GL account — debit items to debit GL columns, and credits to credits. Check each item as you go to make sure you transfer all of them. Then calculate the new balance for each GL account.

When the posting is done, the GL should balance too. If it doesn't… did you enter something without offsetting it? Did you skip an item as you were adding?

Reconciliations

To make sure you and the bank agree on how much money you have, you need to do a bank reconciliation. Match canceled checks with journal entries, then list any outstanding records - interest, service charges, loan payments, pre-authorized payments and uncashed and returned checks in the appropriate journal, and post them to the GL so it's still balanced.

Phase 3 - Financial Statements

We talk about how to read financial statements elsewhere, but there is some essential small business book keeping that goes into the preparation of financial statements, whether you do them yourself of hire an accountant.

Worksheet

It's a fact that all financial records must match the right financial period. But some situations aren't clear-cut and need clarification. To recognize the impact of these special situations, your accountant uses the worksheet for year-end adjusting entries.

After all adjustments, take a Trial Balance - to make sure your GL is still balanced.

Financial Statements

Now account balances can be separated into the Balance Sheet and the Operating Statement.

Asset, Liability and Equity account balances are transferred to the Balance Sheet section, and Revenue and Expense balances to the Operating Statement section, to show the relationship between your operations and your results.

Financial statements contain crucial information you could be using during the year, so prepare an informal set quarterly, or even monthly.

Closing Entries

To get ready for next year, Revenue and Expense accounts are closed to zero, and the difference reflected in a temporary Income Summary account. The balance in the Income Summary is your profit or loss for the year.

If there's a debit balance, credit the summary to close it and debit Retained Earnings. This reduces your equity — time to plan profit strategies for next year.

In Summary

Bookkeeping may not be glamorous, but it can keep you in check, so let's review...

• Daily transactions are first listed in Journals
• Then transferred to account Ledgers
• And these account balances are separated into the Financial Statements, your keys to planning for profit

So stay on top of things when it comes to small business book keeping, even if you must hire someone to keep your records up to date. Remember - shoeboxes are for SHOES!

Additional information on financial forecasting and the other important aspects of business finance is available in the Business Buffet 5-in-1 video program: Financial Forecast, How to Read Financial Statements, Financial Analysis, Cash Flow Forecast and Bookkeeping. Check out Business Buffet here

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