From running payroll to tracking down receivables and calculating the value of inventory, ask any small business owner about bookkeeping and you’ll probably hear plenty of complaints. Learning basic accounting best practices is a great way to keep your books ready for potential investors and the IRS, if they should ever come calling.
Here’s what you need to know about bookkeep
Defining the Terms
Do you know the difference between your cash account and your receivables account? How about the difference between accounts payable and loans payable? If not, it’s time to review basic definitions.
• Cash. Often split between receipts and disbursements, the cash account is where checks and payments are recorded when received or sent. The cash receipts account records payments you get from customers. The cash disbursements account records payments you make to others. Cash receipts and disbursements typically correspond to entries made in payables and receivables.
• Accounts payable and receivable. A/P is the record of the payments you have made in the past and plan to make in the future. If you make payments on a loan, that’s recorded in loans payable. A/R is the record of the invoices you’ve sent to customers. Keeping both up-to-date is essential.
• Sales, inventory and purchases. Sales tracks all incoming revenue, even if payment is not yet due. Inventory is the dollar value of products you have not yet sold, and purchases is the cost of the goods owners use to make products. Service businesses, such as attorneys or writers, don’t usually have inventory or purchases, but they may have sales.
• Payroll, owner’s equity and retained earnings. Payroll includes employee salary data, including payroll taxes. Owner’s equity keeps track of funds invested in a business by the owners. Retained earnings tracks profits that are reinvested into the business.
Documentation and Timely Recording Habits
One of the biggest challenges for small business owners is keeping their books accurate and up-to-date. The best way to do this is to set aside time every day to record pertinent information in ledgers and accounts. When investors or your CPA inquire about the health of your business, providing a clear accounting of your back office is the best way to instill confidence — while also avoiding an audit.
To this end, retaining documentation is absolutely essential. Many businesses use cloud-based record keeping to make accounting easier. Back office accounting can be a full-time job on its own especially if you do not put a system in place.