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Bookkeeping

Many small business owners would rather focus on making sales than keeping track of them. But a good bookkeeping system is essential to maintaining a profitable business. Besides, it is required by law and is an excellent business management tool.

Our Business Information Center has a number of publications available to better acquaint you with the accounting and bookkeeping systems available. We also recommend meeting with a RBC counselor to determine your individual bookkeeping needs. If necessary, we will refer you to an accountant for further assistance. Contact us for more information.

Recording Transactions
Keeping Track of Accounts
Some Common Accounts
Internal Control
Storing Financial Documents
Other Components of a Good Record Keeping System

Recording Transactions
One of the first decisions you need to make is what method should be used to record transactions. There are two basic methods: cash basis and accrual basis.

Cash Basis

The cash basis records income when the money is actually received. This means you may have actually sold the item a few days ago, but the transaction would be recorded when you deposited the check. In addition, expenses are recorded when they are paid, not when they occur. For example, you would record April's utility bill in May when it is paid.

Sole proprietors who have no inventory primarily use the cash method. Usually these are small, service businesses that deal mostly with cash. The advantages of this method may make it desirable from a tax standpoint. In the first year of business, expenses may be recorded right away, while income can be put off until the next year.

Accrual Basis

The accrual basis must be used if your annual sales exceed $5 million and your business is structured as a corporation or if you handle inventory. With this method, income and expenses are recorded as they occur, regardless of whether or not cash has been exchanged. For example, if you make a sale on credit, you'll record that income the same day, even though you may not receive the funds for 30 days. Likewise, an expense is recorded the same day materials are ordered, not when the check is written for them.

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Keeping Track of Accounts
Each business needs to develop a chart of accounts. This is simply a list of your business's accounts that is used to record and follow specific entries. You'll need to assign numbers to each account for easy identification. Usually an account number will consist of three or four digits.

Some Common Accounts

Accounts Receivable

Accounts receivable tracks who owes you how much and when it is due. Usually this system is automated if you sell to a number of different customers. A bookkeeping software system will allow you to track accounts receivable data to specific customers to ensure that billing and collection are done properly.

Accounts Payable

Records of how much you owe to others are kept in accounts payable. Each time you make a purchase you'll need to include an entry in this account. A good automated accounts payable system will alert you when to pay your suppliers.

Inventory

The account that allows you to keep track of merchandise and equipment is an inventory account. Analyzing this account can tell you which items sell well, when to order more supplies, and other important information. Keep in mind that maintaining the system should not outweigh the potential for loss. A good system should:

• Prevent, reduce or at least record losses.
• Assist in buying decisions by showing the fast moving and out-of-stock items.
• Help in planning sales events by showing amounts and acquisition dates of overstocks.
• Keep track of customer owned or consignment merchandise.
• Provide periodic totals of merchandise between physical inventories.

Fixed Assets

Fixed assets are items that are for long-term use, generally five years or more. Examples include vehicles, land, machinery, and buildings. These items are expensed, or depreciated, over the period of time that they are used. There are several different ways to calculate depreciation, so discuss with your accountant which method is right for your business.

Payroll

Payroll accounts contain the salaries and wages payable to employees. Federal and state laws regulating payroll can be very confusing. Because of this, many small business owners choose to use outside payroll services. If you decide to do your own payroll, there are many software systems out there to assist you.

For each employee, the business should maintain a file including the application form, W-2 withholding statement, I9 form, medical records, insurance forms, emergency phone numbers, etc. Payroll records are extremely important. Each hourly employee should fill out a time card to verify compliance with minimum wage laws, overtime requirements, etc. The owner should also maintain a record sheet for each employee showing the weekly hours worked, gross pay, deductions for state and federal income tax, FICA withholdings and the net pay. In addition, the employee must be given their information. Most business checkbooks include an extra stub or carbon copy for the employee to keep. The payroll record should be set up so the owner can figure quarterly payroll totals for reporting purposes.

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Internal Control
When setting up a bookkeeping system, you'll need to state what procedures are required in recording transactions. Precautions such as these will protect your company from employee theft and embezzlement. Some suggestions for internal control are:

• Set up an internal control policy and have all employees read it upon hiring.
• Review the policy on a regular basis to make sure it's up-to-date. If you need to make any changes, hold a meeting to notify employees.
• Make sure all employees take at least 1 week of vacation each year. This is often when embezzlement is discovered.
• Train others in the company to handle bookkeeping duties in case regular staff is out of the office.
• Perform background checks before hiring employees.
• Have checks and balances: one person for accounts payable, another for issuing checks, etc.
• Have your accountant perform unannounced audits.
• Be careful who you hire as an outside financial service provider.
• Back up computer information.
• In the early stages of the business, be able to monitor much of the cash-control procedures yourself.

Storing Financial Documents
It is important to keep financial records in case you ever need to refer to them for tax reasons or other purposes. Below is a list of recommendations regarding how long each type of document should be kept.

Indefinitely

• Income tax reports, protests, court briefs, appeals
• Annual financial statements
• Books of account, such as general ledger
• Income tax payment checks
• Documents substantiating fixed-asset additions and depreciation policies
• Corporate documents, pension records, labor contracts, and license applications

6 years

• Canceled, payroll, and dividend checks
• Bank reconciliations, voided checks, check stubs, and check register tapes
• Sales records such as invoices, monthly statements, purchase orders, etc.
• Purchase records, including purchase orders and payment vouchers
• Travel and entertainment records
• Personnel and payroll records

3 years

• Monthly financial statements
• Subledgers

Important documents such as these should be stored in a fireproof safe. You may also want to consider keeping them in a location other than your main place of business to prevent employee theft. Another thing to consider is storing your documents on disks. This minimizes the mess involved in storage and may help you find records more quickly.

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Other Components of a Good Record Keeping System

A Business Checking Account

Canceled checks stapled to original invoices are the best proof of business disbursements. If the owner deposits the business receipts, intact, each day at the bank, they can construct a replacement set of records in case the original records get burned or lost.

Bank Account Reconciliation

The bank will provide a monthly listing of deposits, checks cashed and the remaining balance of the account. This should be compared with internal records to detect errors, record bank charges and locate any "lost" checks.

Sales Records

Whether the business uses a cash register or hand-written multi-copy sales slips, there should be a system that will allow classification of sales transactions by department or merchandise line salesperson (for evaluation or commission payment), taxable vs. non-taxed items and cash sales vs. charge sales. In some cases, the owner might even want to record markups, discounts, or the gross profit on each sale, and be able to pull out such things as transportation, warranty work, service charges, etc.

Cash Receipts

The cash taken in each day will be a combination of that day's cash sales plus payments for prior sales (charges), deposits on future sales (lay-by or special orders), and miscellaneous income such as rental income, interest income, commissions, loans or an increase in the owner's investment. The owner should design a daily summary of cash receipts form to be completed and stapled to the sales slips or register tape for each day to backup the bank deposit.

Cash Disbursements

These should be entered in a journal with sufficient columns to categorize and total the major expense classifications.

Record of Business Assets

A file should be kept on each major item in the business to safeguard such things as purchase or title documents, warranty or guarantee statements, and repair records

Insurance Records

Each business may have several different types of insurance policies. These should be kept in a safe place and the owner should also make a list of the policy numbers, coverage's, and premium due dates. This list should be reviewed at least once each year with the insurance agent.

Petty Cash Account

In most businesses the owner will have occasional small disbursements that are more simply paid in cash than by writing a check. A check may be written to petty cash and the money retained in an envelope. As the owner spends the money, receipts should be put in the envelope and the amounts written on the front. When the cash balance approaches zero, another check should be written and the total balance carried to a new envelope. The envelopes should be saved to justify tax deductions.

Auto Records

The owner must keep complete records of the number of miles that each car is used in business (total mileage for the year) and the amount spent on gas, oil, tools, tires, depreciation, licenses, garage rent, parking fees, repairs, insurance, lease fees and rental fees. The costs can then be deducted in one of two ways:

• Determine the percentage that business miles were of the total driven and multiply the total of the above costs by the percentage, or
• Multiply the first 15,000 business miles by the appropriate rate provided the owner owns the car, does not use the car for hire (taxi) or does not operate a fleet of cars using two or more at the same time.

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This information is taken in part from Start Your Own Business, by Rieva Lesonsky and the staff of Entrepreneur Magazine. Published by Entrepreneur Media, Inc., 1998, in Irvine, CA.