Bookkeeping 101: Basics of Bookkeeping
It is important for a small business to keep their books year round, not only during tax season. Do not use guesswork when discussing your finances. Well maintained books take the guessing out of business. You can know your budget, your spending, and more when you maintain proper bookkeeping habits. Lenders and investors will also look for well maintained books before opening there checkbooks.
Our Bookkeeping 101 Tutorial will teach you the basics of maintaining proper records within your business.
At Tax Pros Plus, we cannot teach you everything here but please give us a call with any questions or bookkeeping assistance you may need.
Single Vs. Double Entry Bookkeeping
- Only small businesses with a low number of transactions should use single entry bookkeeping. This form of bookkeeping is used much like a check register simply records transactions.
- Double entry bookkeeping is a little more challenging but results in well kept books. Every transaction will be recorded in at least two different places. This method of bookkeeping helps avoid mistakes and gives you a better picture of where your money is going. An example would be if you spend $100 purchasing inventory for your business. In the double entry accounting system you would record -$100 for cash and $100 for inventory that you are adding to your supply.
Cash Vs. Accrual Accounting
- If you are a small business, operating out of your home or just starting out, you may want to begin using cash accounting. This means you record transactions when cash physically changes hands. Some businesses begin using cash accounting then change to accrual accounting as they grow.
- If you plan on charging customers on credit or in installments or if you plan on requesting credit from your suppliers, you will want to use the accrual method. With accrual accounting, you records transactions immediately, even if cash does not change hands using Accounts Payable and Accounts Receivable.
Create a Chart of accounts
- Before you begin balancing the books you will need to know what accounts to establish. Most businesses begin with a small number of accounts which grow and multiply as the business expands. You might begin an account as the one main account, like inventory, and then set up sub-accounts as you progress for different items within inventory.
- Basic accounts to establish when you begin your business bookkeeping efforts incude:
- Accounts Receivable (credit accounts you are waiting for payment on)
- Accounts Payable (credit accounts you need to make payment on)
- Inventory (products you buy from your suppliers)
- Sales (money you make from selling goods or services)
- Expenses (salaries paid to employees and other costs incurred by company)
- Retained Earnings (profits made by business)
- Owner’s Equity (amount owners put into the business)
Balancing the Books
- Using the previous example, we purchased $100 worth of inventory using the cash account. If we then take that inventory, place in our store and sell for $150, we have made $150 cash which we add to the cash account. We then decrease inventory by $100 but what happens with the final $50 because the accounts ALWAYS HAVE TO BALANCE? We increase retained earnings (profits) by $50. This transaction has been greatly simplified because we are not including the expenses of paying employees to unpack and merchandise the product or the overhead cost of the building we rent to sell the product.
- There is a key formula used in bookkeeping to make sure the accounts always balance. This formula is called the accounting equation:
- Assets = Liabilities + Owner’s Equity
- The formula ensures that everything the business owns (assets) is balanced against everything the business owes to vendors and lenders (liabilities) and owner’s claims to the business (equity).
- The most important thing bookkeepers do is make sure the books balance at the end of the period, whether monthly or quarterly.
Prepare Financial Statements
- Important financial statements for a business to maintain includes the balance sheet, income statement and cash flow statement.
- The Balance Sheets reflects the accounting equation previously mentioned: Assets = Liabilities + Owner’s Equity. One on side of a balance sheet you find the assets and on the other side are the liabilities and equity, ensuring that these accounts always balance. The Balance Sheet shows a snapshot of your company at a particular time.
- The Income Statement reflects the accounts set up when you created your chart of accounts earlier like accounts payable/receivable, inventory and expenses.
- The Cash Flow Statement mainly records where your cash goes for your business, sometimes pulling other accounts in as well. You can use accounting software to track these accounts and statements or they can be done by hand. The Cash Flow Statement and Income Statement show the changes in your accounts over a period of time.
- On a regular basis you will draw information from the accounts mentioned above then create your financial statements (typically on a quarterly basis). These financial statements assist your bookkeeping efforts by maintaining proper balances of your accounts and giving you an overhead view of where your money is coming from and going for your business.
These examples were very simple transactions. In real life transactions and bookkeeping can become very complicated. If you need training and assistance using Quickbooks or other accounting software, give Tax Pros Plus of North Charleston a call. If you are overwhelmed with handling your bookkeeping services then outsource all your Charleston bookkeeping services to us to take that load off your shoulders. We offer a low cost and convenient bookkeeping service to clients in Charleston, South Carolina and all over the country. Reasons to use Tax Pros Plus for North Charleston bookkeeping services include:
- Our tax experts know accounting and tax codes better than anyone!
- We offer quality, on time service.
- Using our experienced staff guarantees your books are maintained properly.
- When tax season comes, we have all we need to do your taxes for you.