Bookkeeping Basics For Your Business - Article 2
Filed Under Business | Posted on January 29, 2009
Every small business accounting system has following key components.
1.Chart of accounts
2.General ledger
3.Accounts receivable
4.Fixed assets
5.Accounts payable
6.Payroll
Even if you hire an outside accountant for all your book-keeping and payroll management, we should understand the basic elements of accounting system.
Chart of accounts:
This is the first step in setting the accounting system for your business. This will decide what accounts you have to track for your business. Account numbers are used as an easy account identification system. In general two or three number systems will suffice for most of the business.
General ledger
After chart of accounts we need to establish the general ledger of the system, which is the engine that actually runs your business on a daily basis. Every account that is in your chart of accounts will be included in the general ledger and also in the same order as specified in chart of accounts. General ledger does not include every single accounting entry for a given period, it reflects only the summary of the transactions made. Important component for any general ledger are source documents. Two examples of source documents are copies of invoices to customers and invoices from suppliers. Source documents are very critical and very important for auditrail. Source documents are also important required documents for IRS at tax time. Other examples of source documents are cancel checks, utility bills, payroll tax records and loan statements.
General ledger entries are double entries. For every financial transaction in your business money goes from one place to another. For example, when you write a payroll check money goes from payroll account into employees account as an expense. When u sell an item from your business, you record a sale income but must have a journal entry for accounts receivable. The system used in recording entries on general ledger is of debits and credits.
In general ledger debits always go on the left and credits go on the right.
Accounts receivable
If you plan to sell goods, or provide services on account in your business there should be a method of tracking who owes you how much and when it is due. If you are selling to different customers then the best way to track is through an automated system. This will endure the billing and collection are done in a timely manner.
Fixed assets
Fixed assets are items that are for the long term use of the company. Fixed assets include computers, vehicles, land, buildings and other machinery. In the accrual system of accounting, fixed assets are not fully expensed to the company. But, expensed over a period of time that coincides with the life of an item. This process is called as depreciation of the item. Most business will keep a fixed assets sub ledger with the depreciation schedule.
Accounts Payable
Accounts Payable sub ledger is similar to the one that used to track accounts receivables. The difference is the account payable occurs when you purchase inventory or other assets on credit from a sub layer. It is important to track the accounts payable in a timely manner. Many supplier relationship with your business may be damaged due to poor accounts payable system. Good automated tools will enable you to alert when to pay.
Payroll
This is one of the most challenging subject for a new business owner. There are many federal and state laws regulating what you have to track related to a payroll. Failure in doing so will result in heavy fines. Many business owners use outside payroll services to comply with the applicable laws. It saves lot of time for the business owner to keep out of trouble with the law and saves time that can be devoted to something else in the business.
Cost Accounting
Cost accounting is a process of allocating the costs associated with generating a sale, both direct or indirect. Direct costs include material and labor. Indirect costs include all other costs associated with generating the product. By knowing the total costs associated for generating a product you can determine the items which are profitable to make.
Financial Statements
One of the primary benefits of a good book-keeping system is to generate timely useful financial statements. Most software packages offer capability of producing balance sheet, income statement and cash flow statement.
This is the second article in the series of articles which explains the need for bookkeeping for any business to run effectively. This article explained the key component definitions.
Third Article describes in detail about creating financial statements [Income statement, Balance sheet, Cash-flow statement. Cashflow statement analysis] with samples.
More details on:
General Ledger entries. Accounts payable and Sample Accounts receivable and sample. Requirements from IRS on bookkeeping. Stay tuned for the 3rd Article in the coming weeks. (c) Copyright 2007. All rights reserved.
Satti Vijay Bharath Reddy , is one of the founders of The Cashflow Crunchers, a web site for Investors and Smallbusiness to share investing tips and other information. For more articles, tips, and free online calculators, please visit http://www.cashflowcrunchers.com
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