One of the most daunting tasks you can face when setting up a new business involves the process of establishing an accounting system. The dictionary defines accounting as “a precise list or enumeration of financial transactions”, which is a mouthful and can be translated into “a way to track money coming into and out of your business”.
Accounting does not only tell you whether or not you’re making a profit, but also helps you to track your different sources of income and categories of expenditure and make important decisions based on this information. Within your system you will compose records, including a profit and loss account, a cash flow projection and a balance sheet, which will combine with numerous other reports to give you a good overall picture of your enterprise.
When it comes to setting up an accounting system you must first pick your accounting method. This gives you two choices – either the cash method or the accrual method. The cash method is the more popular and is usually adopted by small business. This method requires you to account for your income when you actually receive it, and your expenditure when you actually pay out. If you normally take immediate payment for a product or service through a check, credit card or cash, this is the method you should likely adopt. The accrual method requires you to account for a sale when it is consummated, not necessarily when you receive the money for it. Likewise, expenses are accounted for when you actually receive the product or service. Companies that use an invoicing system use the accrual method.
Most small businesses choose the cash method as it is much easier to maintain. For example, you do not have to establish records for “accounts receivable” or “accounts payable”, but if your company exceeds $5 million in annual sales you will likely be forced to use the accrual method by the taxation authorities.
Once you have settled upon your accounting method, decide how you are going to record all your transactions. While some people choose to do this by hand, as was common at one time in our history, the majority of people choose to use software. Many different software programs exist, the most prominent being QuickBooks.
Once you have determined your method and your recording platform, set up your chart of accounts. This is simply a listing of the various categories and subcategories. Most accounting platforms use the “double entry” standard, which means that when you make one record of a transaction, you must make a corresponding and opposite record to balance out. This is a highly accurate way of compiling financial records.
It is very important to use your new accounting system religiously. It is strongly recommended that you maintain the system every week, if not on a daily basis. Obviously, the more complex your operation, the more attention you should pay to accurate record-keeping. Always make sure that you record every transaction, be it a check, a charge, petty cash, or a bill.
As the old saying goes, “garbage in, garbage out”. Be careful when entering transactions and do remember to reconcile your accounts. Reconciliation is vitally important, and again should be done on a regular basis, or you will spend many nervous hours looking for your error. At the very least, you should reconcile your accounting system against your bank statements. Always reconcile to the penny, and you will have very accurate records and will be ready to provide the greedy taxman with his share at year-end.
Have you got any other tips on managing your accounts?