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The 10 Bookkeeping Basics You Can’t Ignore

Millions of business owners and startup entrepreneurs are masters at creating great products and services, building awesome teams and winning over customers. Many of them, however, would probably flunk basic bookkeeping.

But if you don’t understand the different types of “accounts” your bookkeeper uses to organize your finances, measuring the success (or failure) of your efforts will be futile.  Being deft at digital marketing, for example, isn’t enough if you don’t have a clear financial picture of your business and run headlong into cash flow problems.

What do your accounts receivable look like? Are you constantly paying your own bills late? Not sweating the small stuff like understanding your own books is trouble in the making, says Lita Epstein, who designs online courses about reading financial reports and is the author of Bookkeeping Kit for Dummies (Wiley, 2012).

Here are basics of the 10 most common types of bookkeeping accounts for a small business that you should know:

  1. Cash. It doesn’t get more basic than this. All of your business transactions pass through the Cash account, which is so important that often bookkeepers actually use two journals—- Cash Receipts and Cash Disbursements — to track the activity.
  2. Accounts Receivable. If your company sells products or services and doesn’t collect payment immediately you have “receivables” and you must track Accounts Receivable. This is money due from customers, and keeping it up to date is critical to be sure that you send timely and accurate bills or invoices.
  3. Inventory. Products you have in stock to sell are like money sitting on a shelf and must be carefully accounted for and tracked. The numbers you have in your books should be periodically tested by doing physical counts of inventory on hand.
  4. Accounts Payable. No one likes to send money out of the business.  But it’s a little less painful if you have a clear view of everything via your Accounts Payable.  Good bookkeeping helps assure timely payments and – importantly – that you don’t pay anyone twice.  Paying bills early can also qualify your business for discounts.
  5. Loans Payable. If you’ve borrowed money to buy equipment, vehicles, furniture or other items for your business, this is the account that tracks what’s owed and what’s due.
  6. Sales. The Sales account is where you track all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
  7. Purchases.  The Purchases Account is where you track any raw materials or finished goods that you buy for your business. It’s a key component of calculating “Cost of Goods Sold” (COGS), which you subtract from Sales to find your company’s gross profit.
  8. Payroll Expenses.  This is the biggest cost of all for many businesses. No matter how much you beg, few people want to work for nothing.  Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
  9. Owners’ Equity.  This account has a nice ring to it. Basically, it tracks the amount each owner puts into the business. “Many small businesses are owned by one person or a group of partners; they’re not incorporated, so no stock shares exist to divide up ownership,” says Epstein. “Instead, money put into the business is tracked in Capital accounts, and any money taken out appears in Drawing accounts. In order to be fair to all owners, your books must carefully record all Owners’ Equity accounts.
  10. Retained Earnings. The Retained Earnings account tracks any of your company’s profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started. Managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how well the company has done over time.

Many business owners think of bookkeeping as an unwelcome chore.  But if you understand and make effective use of the data your bookkeeper collects, bookkeeping can be your best buddy, helping  you run your business more effectively.

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10 Steps to Keeping Better Business Records

For many business owners, record keeping is an unwelcome chore that often gets far less attention than it deserves. There’s no shortage of other things to do that are far more fun.  But keeping good records is essential to running a successful business – and staying out of trouble.  Here are 10 ways to get your business finances and recordkeeping under control – and keep it that way:

1.       Separate your business and personal finances. Many biz owners (especially sole proprietors), and startup entrepreneurs fail to set up separate banking, bookkeeping and other systems to keep track of their business finances, causing confusion, tax headaches and a potential loss of business value later on. Using business checks or credit cards to pay for personal expenses, for example, can get you in legal hot water, and at a minimum complicates your recordkeeping.

2.       Reconcile and don’t delay; do it today.  Review your bank statements and balance your accounts regularly. Don’t just toss statements into a stack. If you let days or weeks pass without updating records, you’ll soon be lost and errors may go unnoticed. If your business finances change daily, you should have bookkeeping systems that update daily as well. This should include daily sales, purchases and other transactions, and especially any cash transactions.

3.       Hire a bookkeeper. Don’t pay an accountant’s higher professional fees to handle routine bookkeeping. Many biz owners have part-time bookkeepers to help keep things in order. The American Institute of Professional Bookkeepers (AIBP) has some excellent bookkeeping tips, and a free bookkeepers hiring test.  Or consider outsourcing it online with a service such as Balance Your Books.

4.       Use calendar month timing. Most business owners find it helpful to account for money on a calendar month basis. But things don’t always line up. For example, if your bank statement isn’t based on a calendar month, ask for it to be changed. Most banks can make that accommodation.

5.       Be pro-active with your accountant. One reason to keep good business records is so you can provide accurate and timely information to an accountant to prepare your business taxes. Ask for their advice on how to set up your books and organize your information.

6.       Use a payroll service if you have employees.  When your business becomes large enough to have employees, recordkeeping requirements take a quantum leap. Outsourcing to a payroll service such as Paychex, Sure Payroll or ADP places the record keeping burden on them, and makes your end vastly easier.

7.       Use an online expense reporting service:  If your business reimburses employees for out-of-pocket expenses (yourself included), you need a process to track and record those costs and make timely, accurate payments. Several web-based services are out to ease the pain with easy-to-use, low-cost systems that make the expense reporting process as quick and easy as possible for small business owners. Choices include Expensify, Concur Breeze and ExpensePoint.

8.       Keep it simple and consistent. Bookkeeping is all about columns, and by keeping the same column headings all the time, you will avoid the frustration of mismatches. And if you avoid over-categorizing income and expenses, you’ll also save yourself time. Often it’s just not necessary to break things down into great detail.

9.       Automate your invoicing. Online billing services that can effortlessly issue your invoices and keep track of everything are one of the most helpful web-based (or “cloud”) small business services arou8nd.  Look at Bill.com and FreshBooks.com in particular. The services are cheap and can help clean up a billing mess quickly.

10.   Get the right software. Don’t even think about keeping your books manually or with spreadsheets. Low-cost, easy-to-use financial software for small business such as QuickBooks, or the free version called QuickBooks Simple Start (both at www.intuit.com) are perfect for keeping everything in order.

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