In this article we are going to look at the reason for keeping accounting records and by the end of this article you will have the knowledge to be able to keep a set of books in their simplest form for a small business.
What we need to look at first before deciding which bookkeeping system is best for our business are the following:-
- Why do we need to keep accounting records,
- Is our Business a Small Cash Based Business
- 3, Does our Business offer Credit Terms to Our Customers
- Do we get Credit Terms from our Suppliers
You may not understand the above terms yet so lets look at each item in detail:-
1 Why do we need to keep accounting records-
The first reason we must keep accounting records is that it is a statutory requirement. At the end of our financial year we have to produce a set of accounts in order to fill out a personal tax return, or in the case of a limited company file a set of accounts with the Registrar Of Companies. And if we are registered for VAT we need the information from our records to complete Vat Returns.
Secondly and the most important as far as we are concerned is so that we can keep track of where our business is going:-
- Are we making a profit or a loss?
- Which products within our business are making a profit and which are making a loss?
- Are we in line with the business plan we put together before we started our business and did our initial business research?
- We may have put together a Business Plan which we took to the Bank in order to get a loan to start our business. If we did the chances are that the bank are going to want to see if our business is in line with that plan on a regular basis. In other words the Bank may ask you to produce Monthly Management Accounts”
- Is our Business a Small Cash Based Business?
If we have only just started our business, maybe it’s a small work at home business, we probably start by only selling products to people who have paid us first. Similarly because we have only just started our business we probably cannot get credit facilities from our suppliers so we have to pay cash up front to get our products. If this is the case we only need a very simple bookkeeping system. All we need to do is keep track of our Cash Receipts and Cash Payments. All we need for this is what Accountants call a Cash Book.
3, Does our Business offer Credit Terms to Our Customers?
If we have products or offer a service whereby we allow our customers or clients to pay for our product or service at a later date we are going to need to keep some record of who owes us money. For example I am an Accountant and although most of my business is cash based if I were to keep your accounting records, I would have to spend time writing up your books and then producing your accounts which I would then review with you. I would have initially spent time on producing those documents which I would keep a record of and then produce an invoice for you which you would then pay either now or at sometime in the future. Therefore what I would do is have a book to keep a record of the sale. Accountancy Term:- Sales Day Book And also a record of when you paid me for that sale. Accountancy Term:- Sales Ledger
- Do we get Credit Terms from our Suppliers?
This is the reverse of item 3 above. If our suppliers allow us to have goods that we pay for at a later date then we have to keep a record of- What we have bought. Accountancy Term:- Purchase Day Book and who we owe money to. Accountancy Term:- Purchase Ledger
So how do we keep these business records?
To best answer this question because it will vary for different types of business and it is one of the most difficult things to learn as an Accountant when you start from scratch to put someone’s records together in order to produce a set of accounts in the quickest time possible.
Once you understand this process it is really quite simple. If you only want to keep your records and let your accountant put your year end accounts together for you. If you at least understand the following you will save a lot of money on your accountancy fees because your accountant will charge you base on the time it takes to analyse your books in order to but those final accounts together..
So this is where we are going to start.
We are going to start at What information do we need at the end of the day?
We are going to start by looking at this process by assuming that you keep the simplest set of books discussed in section 1 above (i.e. a Cash Book. Record of Receipts and Payments) When we say Cash Book we mean a record of Receipts into your Bank Account and Payments from your Bank Account. Every business will have a cash book no matter what its size and it is where your Accountant will start when he produces your year end accounts or does your bookkeeping for you.
Because your Bank Statements are the only independent check that your records are correct. By this I mean that your Bank Statements are the another (wait for it another) Accountancy Term:- Double Entry to your Cash Book. This term Double Entry is the one most feared by anyone starting to learn accountancy and take the bookkeeping stage to Trial Balance stage. You don’t need to worry about it so much as a bookkeeper because you are just working on one record at a time. So what is the end result that we are aiming for?
Simple. Another Accountancy Term:- Income and Expenditure Account.
What is this. Simple:-
- A List of our Income From our Cash book Receipts
- And a list of our Expenditure From our Cash Book Payments
So an Income and Expenditure Account will look something like this:-
- Joe Blogs Income and Expenditure Account For The Year Ended 30th April 2010
- Income A
- Expenditure Directly Related To Sales:-
- Purchases B
- Carriage C
- Total Direct Expenditure B+C=D D
- Net Income Directly Related to Sales A-D=E
- Other Expenses:-
- Rent and Rates F
- Heat and Light G
- Advertising H
- Printing and Stationery I
- Telephone J
- Postage K
- Sundry Expenses L
- Bank Charges M
- Bank Interest N
- Total Other Expenses Total F to N= P P
- Net Income E-P
- Financed by:-
- Fixed Assets
- Cash at Bank Q
- Capital Introduced R
- Less Drawings
(I use letters in the example so that you will see below how the totals are used from the cash books)
* NOTE:- EXPENDITURE ITEMS CLAIMED AGAINST BUSINESS INCOME MUST DIRECTLY RELATE TO THE BUSINESS.
So if you have or rent an office to carry out your business you can claim the headings marked with a *. If however if you work from home. You will not be able to claim your House Rent, Heat and Light and all of your Telephone bills. You can however claim apart of your household bills as a proportion of the time and space used to run your business from home. And of course the business related expenditure of your Telephone calls.
The Rent and Rates and Heat and Light proportion would be claimed under the heading:-
Use of Home as Office.
For this proportion it is best to get advice from your accountant. Topics such as this are out of the scope of this article.
So now we know the basic layout for our Cash Book. We will use two books, one for receipts and another with more columns for our payments.
CASH BOOK RECEIPTS Layout:-
Date______Received From__Total___Sales___Other Receipts
1 July 10________Mr A__________100_____100
4 July 10 _______Mr B___________ 25______25
6 July__________ Mr C__________ 50______ 50
7 July _________Company D ____250_____ 250
14 July ________Company E____ 100 _____100
20 July Cash Introduced _______1000 __________________1000
Month Total________________ 1525 (Q) ___525 (A) ______1000 (R)
Notice here I have introduced a heading here that is not in the Income and Expenditure Account. This is because these are of a Capital nature and belong to the Balance Sheet Part of Your Final Accounts. Again this might confuse you and you might need the assistance of an accountant here.
However JUST TAKE NOTE OF THE SIMPLE BOOKKEEPING LAYOUT AND PROCEDURE.
Also notice that when we total each individual column, because we have analysed our individual receipts across the cash book headings. If we add together the totals of each individual column they should equal the total in the total receipts column. (i.e. 1000 + 525 = 1525) This is called X casting. It makes sure that our books balance.
Oh. And by the way add these totals up at the end of each month. That way it is easier to reconcile your cash book with your bank statements.
CASH BOOK PAYMENTS Layout:-
___________________Number___Total___Purchases__Carriage__Rent and Rates___ etc.
6 July ____Company X_____100010____100________100
14 July___Company Z_____100011______30___________________ 30
Month Total ______________________130 (Q) _______(F)_______ (G) _________ (H)
I think you get the idea.
Don’t forget that when you add up the “Total Column”:- 100 + 30 = 130 (and of course you will have more entries than this) Your check is to make sure that the total of each of the analysis columns add across to the same figure.
i.e. F + G + H + etc. = 130 Great we X cast.
So to summarize.
You now know how to keep business records in its simplest form. You know why you are keeping them. When you first set up your business this is probably all your going to need to start with. When you take these books to your Accountant at the end of your financial year all he needs to do is balance the cash book up with Bank Statements. And then prepare the Income and Expenditure Account.
You can see how easy that is for him to do now. He has all the figures that just slot into place.. Hey you can probably do it yourself now! Of course it gets more complicated than this when we start introducing Sales Day Books and Purchase Day Books.
See you next time.
I hope I have been helpful.
Adrian Lord is dedicated to helping businesses and those who wish to start a new business. He is an Accountant with more than 20 years in the profession and has helped many people start there own business.