Small business owners can learn to set up a simplified small business accounting system to save cost. It is a modified single-entry accounting system for accrual-basis accounting. The records are basically designed to be used on a calendar-year basis. Within these basic parameters, the system can be individually tailored to meet the needs of most small businesses.
Chart of Accounts
The backbone of the recordkeeping system is the chart of accounts for your business. A chart of accounts will list each of the income, expense, asset, or debt categories that you wish to keep track of. Every business transaction that you make and every financial record that you create will fit into one of these four main categories. Your transactions will either be money coming in (income) or money going out (expenses). Your records will also track either things the business owns (assets) or things the business owes (debts). The chart of accounts will allow you to itemize and track each of these four broad categories in detail.
Business Bank Account and Petty Cash Fund
After the basic chart of accounts is set up for your business, you will proceed with your first financial transaction: setting up a business bank account and a petty cash fund. Every business must have at least one business checking account to be used to keep a record of payments for expenses and to record income deposits. Additionally, every business should set up a petty cash fund in order to simplify the recording of cash transactions. Regardless of the number of transactions, a clear and understandable system to keep track of such transactions is necessary.
After the bank account and petty cash fund are set up, the first of the recordkeeping accounts that you set up will be the asset accounts. Each of the assets of a business within a single category will be assigned a separate asset account. Any real estate owned by the business will have an account; any vehicles will have an account; any inventory will have an account. Using these asset accounts, you will be able to rack the ongoing value of your business possessions. Double-entry accounting provides that every income and expense transaction also alters various asset and liability account balances. While this is true, for most business purposes it is unnecessary and overburdening to keep a day-to-day balance in most asset and liability accounts. Thus these accounts will be updated only periodically; either monthly, quarterly, or annually, depending on your particular business needs.
When you set up the asset accounts, you will also set up inventory accounts. This particular form of asset has its own rules which govern how the accounts should be arranged in order to provide you with a clear picture of your inventory and to comply with tax regulations.
You will also need to set up debt accounts for any debts of your business. Each debt will be assigned a separate account so that the principal and interest of each debt can be clearly recorded and tracked. As with the asset accounts, you will be updating these accounts only on a periodic basic, depending on your business needs.
Expense accounts will most likely be the most complex and numerous of the type of accounts which you will set up. You will be setting up an account for each type of expense that you may encounter in your business. Most of these accounts will be arranged to correspond to the information that you will need to supply for tax purposes. The various expense accounts that you set up will allow you to substantiate all of the business deductions that you take at tax time. Expense accounts may also, of course, need to be set up to allow you to track expenses for particular projects, particular properties, or particular portions of your business. The purpose of setting up your expense accounts is to allow you to categorize and itemize the amounts which you spend on each particular aspect of your business. This will then allow you to see what your costs are per category at a glance. In order to do this, you need to keep daily or weekly track of your expenses and total your expenses periodically to summarize your spending.
As you set up the expense accounts, you will also be setting up a system of recordkeeping to keep track of certain expenses. Automobile expenses and expenses associated with travel, entertainment, meals, and lodging are some of these types of expenses.
Income accounts will be set up for each type and category of income that you will be dealing with. This will allow you to track the sources and amounts of revenue that your business takes in. The use of invoices and statements as well as the details of credit sales will be coordinated with the recordkeeping requirements of income accounts.
Depending on your type of businesses, statements may be prepared monthly, quarterly, or only annually. Summaries of the information from your asset and liability accounts will be used to prepare balance sheets on a periodic basis. This will allow you to monitor the relative health of your business.
In summary, the following is a checklist needed to set up your business financial recordkeeping:
- Set up your business chart of accounts
- Open a business checking account
- Prepare a check register
- Set up a business petty cash fund
- Prepare a petty cash register
- Set up asset accounts
- Prepare current asset account records
- Prepare fixed asset account records
- Set up expense account records
- Set up income account records
- Set up payroll system
- Prepare payroll time sheets
- Determine proper tax forms for use in business