The 10 Bookkeeping Basics You Can’t Ignore
Single-Entry bookkeeping is much like keeping your check register. You record transactions as you pay bills and make deposits into your company account. It only works if yours is a small https://www.bookstime.com/ company with a low volume of transactions. Purchase ledger is the record of the purchasing transactions a company does; it goes hand in hand with the Accounts Payable account.
Balance Sheet and Profit & Loss
They usually write the daybooks (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the general ledger. Thereafter, an accountant can create financial reports from the information recorded by the bookkeeper. “Bank rec,” as it’s sometimes called for short, can take a while since it requires going through every transaction you have on the books with the amounts your bank statement shows. But — hurray! — this is where your bookkeeping software can really start pulling its weight.
This means that every transaction will be entered into your accounting records twice — once as a debit [Dr] entry and once as an equal and opposite credit [Cr] entry. At Clear Books, we aim to make accounting as simple as possible — so you can spend less time worrying about keeping track of your accounts and more time growing your business. With this in mind, we’ve created a handy guide to the basics of bookkeeping, which will help you get started — or refresh your memory.
It isn’t physics, but for managing a business, it’s just as important. Negative Retained Earnings With single-entry bookkeeping, you enter each transaction only once.
In addition, keeping receipts and canceled checks will back up whatever deductions and tax credits your company takes. Without good record keeping, you leave yourself exposed to fines and penalties if you get audited. Late-paying customers is never a good thing and it can have a negative impact on your cash flow.
For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once.
The type of account defines whether a transaction either debits or credits that account. However, most bookkeeping is done using the double-entry accounting system, which is sort of like Newton’s Third Law of Motion, but for finances. Newton’s law holds that “for every action (in nature), there is an equal and opposite reaction.” Likewise, in double-entry accounting, any transaction in one account requires an equal and opposite entry in another account.
You’ll save time chasing receipts, protect yourself from costly errors, and gain valuable insights into your business’s potential. But bookkeeping mistakes are costly and threaten success. For instance, ever looked at your bank statements and thought, Where is all the money we made this month?
Income tax rates
- Micro-businesses can get by with personal finance software such as Quicken.
- Revenue is all the income a business receives in selling its products or services.
- Make sure you pay attention to when your receivables are due and don’t waste time when they’re overdue – act right away.
Most bookkeeping systems use the double-entry method. As a rule, for every transaction, you will debit one or more accounts and credit one or more accounts, with the total amount of your debits and credits equal.
Micro-businesses can get by with personal finance software such as Quicken. Your posting schedule depends on your sales numbers. Generally speaking, the more sales you do, the more often you should post to your ledger.
Accounts Receivable. If your company sells products or services and doesn’t collect payment immediately you have “receivables” and you must track Accounts Receivable. This is money due from customers, and keeping it up to date is critical to be sure that you send timely and accurate bills or invoices.
Each of your business’s sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. You’ll use these to create summaries of your transactions. Online accounting solutions are another option. Internet-based accounting solutions allow multiple users to access company records from any computer with an Internet connection.
But if you can’t afford to or don’t want to hire an accountant, you can learn the basics by taking a bookkeeping class at a community college or small business center in your area. In order to know how much you owe the IRS, you need an accurate picture of your company’s income.
The main thing to avoid is regularly dipping into the wrong pot, like treating yourself to lunch every week with the business’s money, or covering the rent for your office space with your own funds. This type of activity can increase your legal liability, especially if your business is set up as a sole proprietorship — if your business is ever sued, for example, your personal assets could be at risk.
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For example, if you write a check for $100 to purchase $80 of office supplies and mail a package for $20, you would credit cash for $100, debit office supplies for $80 and debit shipping expense for $20. Other transactions might https://www.bookstime.com/bookkeeping-101 affect only two accounts, such as a rent payment. The single-entry and double-entry bookkeeping systems are the two methods commonly used. The single-entry method is similar to a checkbook; there are only debits and credits.