At the heart and life of your business is your bookkeeping system. If your system is setup and operating properly you will be able to turn your financial data into useful information and make smarter business decisions. Below are 4 ways to setup and maintain your bookkeeping system.
1.) Select an accounting method. There are 2 methods for recording your transactions:
- Accrual basis. Accrual basis records your transactions upon delivery of the good or service. Generally, a large businesses that buys from vendors on account (accounts payable) generally use accrual-basis accounting.
- Cash basis. Usually, cash basis records your transaction when payments are made. Cash-basis is easier to track and a useful option for smaller businesses and sole-proprietors.
Financial transactions and the way your financial statements are displayed will be affected by the accounting method you select. As you make your selection, you should also consider outside factors. For example, the IRS regulations say that businesses having gross receipts of more than $25 million must use the accrual basis. Other factors to consider are bank covenants and industry standards. After your selection is made, you may change it but you must report the change to the IRS.
2.) Design an account structure to fit your business. Included in your bookkeeping system is a chart of accounts. This accounts will sort your business transaction data into 6 groups that include:
- Cost of goods sold and other expenses.
Each of these groups will often have many accounts and sub-accounts. By creating the right mix of organized accounts will ensure that you properly classify your transactions and prepare functional financial statements. Having the proper account structure will mesh your specific information needs.
3.) Accurate and well-timed transactions. The value of your data depends on each transaction being recorded correctly and in a timely fashion. Transactions entered in the wrong account will cause major problems in the future. Delaying financial reporting can hide problems that may need immediate attention. Although, some transactions may be pretty straightforward, some are more complex such as, payroll, accruals and deferrals. It’s essential that you have someone that understands both your business and accounting rules entering your transactions in a timely manner. You should also have a good month-end close process to review each account in order to find any initial entry errors.
4.) Create financial statements for making important decisions. Each financial statement has a specific purpose. The main financial statements are:
- Income statements (“income - expenses = gross profit) show your business performance for a certain period of time. Generally, monthly with a full year summary. A new income statement restarts at the end of the year.
- Balance sheets (liabilities + equity = assets) shows the health your business as of a certain date. It includes 1 line from the income statement that summarizes the current year and the prior year results and doesn’t end until your business is closed or sold.
- Cash flow statement. This is a summary of the business inflow and outflow of cash. Over time, it tells you if you have enough cash as well as the pattern of your cash position over time.
If your bookkeeping system is operating properly you will have accurate financial statements that you will be able to use for multiple tasks, such as:
- Financial reporting
- Raising capital
- Applying for a loan
- Tax reporting
- Decision making
At Summit CPA we offer multiple resources to assist and help your business grow. If you’re ready to get an edge on your competitors? Contact our office at (866) 497-9761 to schedule an appointment with our advisors.