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Bookkeeping is the basis of all small business insights. If you are running a small business, you have to make it a habit. Often, bookkeeping is set aside by small business owners to deal with the most pressing matter of the moment. If it is not, it is procrastination or number phobia (fear of being wrong).
Trust me, don’t put it aside. Too many small business owners often allow a backlog of transactions and expenses to build up before they settle, which can hurt your business in at least two significant ways.
First, it creates confusion. Up-to-date bookkeeping tells you the important things you need to know. Without it, you’ll only have an idea of how much money you have, what outstanding bills you have to pay, and whether you’ve been paid for the goods or services you provide.
Second, ignoring bookkeeping makes paying your taxes more complicated. There are few things worse than being on a deadline and sorting out a paper bag full of receipts for items you might cut — plus you’re trying to meet a deadline for a customer. Using a tax accountant or preparer isn’t cheap either.
This is the good news: You don’t need a finance degree to understand and benefit from bookkeeping. Double-entry bookkeeping, the way accounting is done today, dates back to the 15th century. If you’ve ever made a checklist of the items needed to complete a task and then marked those items as they were collected or completed, you’ve got the gist of bookkeeping.
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When you’re ready to start your own bookkeeping, here’s the syllabus for your non-degree course:
- Accounts, Accounts group similar business activities for ease of analysis (ie a sales account). Your complete list of accounts is called your chart of accounts. Items on this list include sales, cost of goods sold, salaries – all the business activities you perform.
- accounting period: This is the specific time period over which you are looking at your business. For example, you might want to know how you performed in February. or the third quarter. or year. Or since you started advertising.
- accounts payable: This is money that you currently owe to vendors or suppliers but have not yet paid. If you bought a computer that you haven’t paid for yet, it’s an accounts payable account.
- accounts receivable: You’re done and billed, but the client’s check is in the mail. That account is receivable.
- sourcesExpenses or revenues that you have incurred but not yet paid (this means accounts payable and accounts receivable are accruals). If you are using accrual-based accounting, you record accruals (both positive and negative) at the time of the sale. In cash-based accounting, you must have recorded when you paid or received money. The advantage of accrual-based accounting is that it lets you know that while you may have cash, you don’t have to spend it independently. You may be owed for that shipment of raw materials you just received. Conversely, you may have worked a full month for a client but have not yet been paid for that work.
- Property: things owned by you, physical or intangible. These can be items such as property, vehicles, cash, a computer, or the right to use a particular parking space.
- Balance sheet: This document summarizes all your assets (that you own) and compares them with all your equity and all your liabilities (what you owe). With it, you can assess the overall financial health of your organization.
- cash flow: Usually the money you get is compared with the money you have to pay.
- Cost of Goods Sold (COGS): If you make a product, the sum of the costs is directly related to making that product. So, if you are a bakery, these will be ingredients such as flour, sugar and eggs, as well as the cost of using the kitchen in which you bake. When you subtract your cost of goods sold (which is your total sales revenue less sales discounts, allowances or returns) from your net sales, you get your gross profit.
- double-entry bookkeeping: By recording each entry as a credit and debit, you see the source of your money and where you are spending it. This makes it easier to catch errors. Credit cash when you buy a property; Debit an asset account when you spend money for that asset (for example, “computer expenses”). When you check everything, it’s called creating a trial balance, which is a way of telling you whether your debits and credits are accurate. If your debits and credits don’t match, someone should look at each item until you find the source of the error. While painstaking, catching these discrepancies is a real advantage of double-entry bookkeeping.
- equity: The value of your business and who owns it after your liabilities have been paid (that equity may be yours or may be shared with a partner or investors).
- ExpenseWhat do you spend to keep your business running? Your expenses may be items you need to make the product you sell. These can include the cost of renting your building, your office supplies, your payroll and so on.
- General bookkeeping: This traditionally lists all the individual accounts needed to delineate the assets, liabilities, equity, revenue, expenses, profit and loss transactions of your business. Rather than listing each transaction in detail (say, weekly telegrams starting in January), it summarizes them chronologically in journals, such as the Raw Inventory Journal or the Sales Receipt Journal.
- Income Statement (Profit and Loss Statement)This document compares your expenses to revenue to reveal whether your business earned or lost money in a certain accounting period.
- liabilitiesMoney that you owe but haven’t paid, such as outstanding invoices, credit card balances, and any business loans you’ve taken out. If your business’s liabilities exceed its assets, your business is in trouble.
- payroll: A complete list of your employees and how much each is paid, as well as how much you pay in taxes and retirement contributions.
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The next non-MBA skill you need to learn is diligent and accurate recordkeeping. Spoiler alert: A box full of disorganized receipts and related financial papers that you don’t see until a few minutes before tax time is neither efficient nor record-keeping.
Watch out for other systems that seem like they should work, but are flawed. For example, keeping your journals in notebooks or file folders — no matter how easily accessible — can be tedious and lead to errors. Likewise, spreadsheets look compact, they are flexible and most people have a basic understanding of them. Nevertheless, they lend themselves easily to error and can quickly become complicated.
Here’s what really worked to master your bookkeeping: an online platform that allows your data to be quickly scanned and one that organically links to your bank accounts and credit cards.
Such a platform is easy to set up and can automatically perform most of the tasks that help you best. There are many such platforms (eg clean and QuickBooks) that provide the ability to classify your expenses and income into standard accounts to help you quickly understand your business finances and where opportunities for improvement exist.
So go ahead and toss your hat in the air. Within minutes of reading this article, you have mastered the essence of bookkeeping without an accounting degree. Now go ahead and be profitable.