(posted 6/22/98)

Keeping accurate and up-to-date records will help you stay on top of things and give you a framework from which to grow.

Bookkeeping is the first step of your company's accounting system. It's all about writing a financial history as the story unfolds, using a language and following certain rules so that everyone who reads the story can understand it.

You need to learn about bookkeeping because:

• It will help you get your ducks in a row when it's time to do taxes or if you should get audited.
• You'll need to present financial statements if you ever seek financing or try to sell your business.
• It's a great tool to help you prepare budgets and keep track of the progress of your company.

Stand Up and Be Accounted

It's called accounting because the whole system is based on describing what's happening to accounts, which in this case are your company's various assets, liabilities, and forms of equity. It's called bookkeeping because the transactions that affect each of these accounts are recorded separately in books, called journals and ledgers.

When you do the books, you keep track of:

• Sales and revenues
• Cash transactions
• Accounts receivable, if you extend credit to your customers
• Accounts payable, if you purchase materials from your suppliers on credit

The Books of Bookkeeping

How many books does a bookkeeper keep when a bookkeeper does keep books? Daily transactions are recorded in journals. Periodically (usually monthly) this information is transferred to ledgers. How many journals and ledgers you use depends on the size and type of your business.

Journals
The first stage of your bookkeeping system is to enter daily transactions in books called journals.

Sales Journal
Number your invoices and keep two copies besides the original. Give the customer the original, file one copy in the customer's file, and file one copy numerically. Before you file the copies, take the information from one to record it in your sales journal. Be sure to include:

• Date of the sale
• Quantity
• Price
• Quantity multiplied by price
• Terms (COD, net 30, and so on)
• Payment due date

Cash Receipts Journal
Cash register or cash sheet totals should be recorded in a cash receipts journal at the end of each day. A daily cash sheet is a record of all the cash you take in each day. Even if you use a cash register, you should prepare a daily cash sheet as a backup and to keep track of discrepancies.

Some bookkeepers combine the sales and cash receipts journals into one book; some keep them separate.

Cash Disbursements Journal
This is where you record your daily cash disbursements, or the money you pay out each day.

General Journal
If most of your business does not involve cash transactions; you can use a general journal to record all your daily transactions. Some companies that rely heavily on daily cash intake use general journals as well for transactions other than cash to keep these categories separate.

Ledgers
Periodically, bookkeepers transfer the information from journals to ledgers using a process called posting. As each journal entry is recorded, a mark is placed in the post column of the journal to show that it has been recorded in the ledger. A general ledger usually has a separate page for each account. If you extend credit to your customers, you should also keep a separate (or subsidiary) ledger for accounts receivable. You need an accounts payable subsidiary ledger as well to record information about balances owed. Both accounts receivable and accounts payable figures are also recorded in the general ledger.

Double-Entry Bookkeeping
The double-entry system is the most common and effective form of bookkeeping. It works like this: Each account has two sides. The debit side appears on the left and the credit side appears on the right. One side records the increases; the other side records the decreases. Increases in assets appear on the debit side of the account. Decreases in assets are shown on the credit side. The opposite is true of liabilities and equity. Increases in liabilities and equity appear on the credit side and decreases appear on the debit side. When everything is recorded, the debits and the credits must match. This is called making a trial balance. If there are discrepancies, you know there's a mistake somewhere. It's a master system of checks and balances and it's a great way to catch errors.

Here's an example. If you buy a new computer and pay cash, you increase the asset account called Office Equipment by entering a debit and decrease the asset account called Cash by entering a credit. Those two columns must be the same. Every time you debit one account, you credit another.

Financial Statements
Using the information you've recorded in your bookkeeping entries, you can prepare financial statements, which are useful tools for measuring the progress of your company in terms of its income, expenses, and assets. If you decide to seek financing at some point, you'll need to present these documents to potential investors, banks, and other sources of capital.

Income and Expense Statement
The income and expense statement takes the total amounts of all the income and expense accounts from the trial balance in the ledger. This is called the net income, or net profit. If the total expenses are more than the income, the result is called a net loss.

Balance Sheet
The balance sheet is the financial statement that describes your company's assets, the amount it owes, and its equity, or the amount that is clear of debt. Current assets, or the amount that can easily convert to cash, are recorded first. Then come the liabilities, or debt. And finally, the equity, or owners' investment, as well as the net income taken off the income and expense statement. If the income and expense statement shows a net loss, it's deducted from the equity. It's called a balance sheet because the liabilities plus the equity must equal, or balance, the assets.

Should You Keep the Books Yourself or Hire Help?

You can probably do your own bookkeeping if your business is small enough and you feel you have the time. Many entrepreneurs and people who work from home, though, use the services of a part-time or freelance bookkeeper, gradually increasing their hours as the business grows. If you go this route, expect to pay about $25 an hour.

Bookkeeping and Accounting Software
You might be able to get away without a bookkeeper by using one of the software programs available from Peachtree or Intuit. Most bookkeeping software can handle double-entry accounting, inventory, payroll, receivables, payables, and cutting checks. Many packages come loaded with templates for invoices, sales orders, and other bookkeeping paperwork. Before you buy any bookkeeping software, consult your accountant first to see if you need to get something that's compatible with what she uses so things go smoothly at tax time. Ask her what she thinks of these:

• Quicken (Intuit)
• First Accounting (Peachtree)
• Quickbooks Pro (Intuit)
• Complete Accounting (Peachtree)

Susan Kushnick is a business writer, editor, and researcher based in New York. She has contributed material to If You're Clueless About Starting Your Own Business, The America Online Insider's Guide to Finding Information Online, and the upcoming Kinko's SOHO Sourcebook.

Keeping the Books: Basic Recordkeeping and Accounting for the Small Business, Plus Up-To-Date Tax Information, by Linda Pinson & Jerry Jinnett
Business Owner's Guide to Accounting & Bookkeeping, by Jose Placencia, et al.
Accounting and Recordkeeping Made Easy for the Self-Employed, by Jack Fox