Bookkeeping Basicsfor Success

Hold Onto All Original Records

BOOKKEEPING BASICS FOR SUCCESS

Bookkeeping is a fundamental part of the life of a small business. While it may not be the most exciting aspect of running a business, if the books are in order, the business’ direction will be clearer to stakeholders and potential investors. It is thus imperative to familiarize oneself with a few essential basics that will lead to a vibrant, healthy, and thriving enterprise. Users of the financial statements will need this information, and if you are ever eager to solicit investments, the financial data that you put together through bookkeeping will be useful as well. Here are a few of the basic guidelines to keep in mind when approaching bookkeeping for the small business.

The first step in effective bookkeeping is keeping all records for accounting purposes. You will need to reference them when you enter information to your accounting ledger. Also, should the Canadian Revenue Agency ever require proof of your expenditures, you will need those documents. The records, indicating your income and expenses, should be - according to tax experts - held for a minimum of six years after the closing date.

Choose the Appropriate Styleof Bookkeeping

Familiarize yourself with the various styles of bookkeeping and choose the one that will give you the most bang for your buck. It is a good idea to consider how much energy you must put in to learn and practice these styles. While computerized systems are the norm in most businesses today, it is important to understand the underlying concepts of the bookkeeping.

Single Entry Bookkeeping - This is the simplest method of bookkeeping and goes well with smaller, simpler businesses. The idea is you record every dollar transaction only once (in a revenue and expense journal) and at the end of the period, you tally the transactions and transfer them to an income statement.

Double Entry Bookkeeping - Used for more elaborate businesses, this system entails writing two entries per transaction (a debit and a credit). These transactions will affect the adjoining accounts and illustrate to anyone interested how cash flows through your business.

BOOKKEEPING BASICS FOR SUCCESS

Research and Follow theAppropriateAccounting Principles

When bookkeeping and preparing financial statements, it is imperative that the end user be kept in mind. It is to this end that accountants have come together and created something known as accounting principles. There are two broad styles of accounting principles that companies are required by law to follow. These are the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). Public companies must use the former, whereas private companies are given the option of using the former or the latter. The main difference between the two is that the IFRS stems from a global initiative with the goal of transparency and usability of accounting information, whereas GAAP is the standard framework of guidelines used historically under Canadian jurisdiction.

Consider Outsourcing Some or Allof Your Accounting Practice

Depending on the complexity of the accounting component of your business, it may be worthwhile considering contracting out this function or hiring an accountant to help you. Although it is a good idea to learn as much as possible about bookkeeping, not all business owners are willing to become well-versed in the art of accounting, and many would prefer to focus on their area of expertise. When looking for an accountant, whether it is a CPA (Chartered Professional Accountant) or another type of expert, it could be useful to turn to your local industry association to point you in the appropriate direction.

One-Write Systems - The most efficient type of bookkeeping, this system simply copies the financial information at the time of the transaction, either manually by hand or through an electronic system. The data can then be transferred to a record system.

Computerized Systems - Fast and versatile, these systems allow you to process as much or as little data as is required - offering scalability - and can produce highly detailed financial reports on a daily, weekly, monthly, or yearly basis. As the software industry evolves, more and more businesses are taking advantage of these systems.

Keep Accurate Journals and Ledgers

BOOKKEEPING BASICS FOR SUCCESS

While many accounting software packages out there are extremely useful, it still helps to have an understanding of how journals and ledgers function (the software package will still use this terminology). A journal is a book that accountants use to keep track of transactions. A company could have several journals keeping all similar types of transactions together, or could just have one large journal where all transactions are recorded. When keeping a journal, the main idea is that for every transaction, a debit and credit are recorded so that the account is balanced. Having debits and credits maintain what is known as a "balanced accounting equation".

A ledger is the destination of the transactions recorded in the journal. In the journal, ending balances are not shown, only debits and credits. The ledger takes the transactions from the journal and records it into the appropriate account. The ledger sums up the activity in each account so that that information can in turn be used in the balance sheet and the income statement. There are three basic types of ledgers.

Sales ledger - This mainly deals with the accounts receivable account. It keeps track of the income paid to the company from customers.

Purchase ledger - This ledger keeps track mainly of the purchases made by the company. The main account that is used to determine this ledger is the "accounts payable" account.

General ledger - This is the basic type of ledger, keeping track of five of the main types of accounts (assets, liabilities, equity, income and expenses).

Even though bookkeeping may not be your favourite task when running your small business, doing the research and adopting the best practices right from the get-go can save you time and money down the road. Being on top of your bookkeeping can also simplify your relationship with the Canadian Revenue Agency when it comes time to do your taxes. Even though the option is there to outsource the bookkeeping responsibilities to a credible professional, having a working knowledge of this critical area of business management will make you a more effective business owner. You will be able to monitor the financial lifeblood of your company, and ensure that everything is healthy.