Creating a bookkeeping system
It is prudent to make sure you understand the necessary bookkeeping processes needed to keep your business’ financial details in check. You may plan to call in a bookkeeper to do the bulk of the administrative work, but you will still need to know the elements involved in a bookkeeping system.
Your bookkeeping system should be structured so that you can measure the viability of the business by comparing these following five key indicators at least monthly:
Turnover (total revenue)
Debtors (what is owed to the business)
Creditors (what the business owes to others)
Stock value
Overdraft or cash in the bank.
You should monitor these entries to ascertain the performance of your business. You should pay particular attention to any changes which could indicate that the business is failing or growing.
Double-entry bookkeeping
One method of bookkeeping is the double entry approach. It is usually the preferred method of keeping financial business records. Transactions are first entered into a journal and then monthly totals of these transactions are posted to appropriate ledger accounts.
Modern day computer programs (eg. MYOB or Quicken) can effectively record the daily transactions of a business. This way, much of the “hack-work” is handled by the owner (or the staff), and the accountant’s fees are minimised, especially if his/her services are confined to the more complex accounting and tax advising areas. The five categories of ledger accounts are:
1. Revenue
2. Expenses
3. Assets
4. Liabilities
5. Owner’s Equity
Income and expense accounts are closed each year; assets, liabilities and owner’s equity accounts are maintained on a permanent and continuous basis.
Single entry bookkeeping, although not as complete as the double entry method, may be used effectively in a small business, especially during its early years. The single entry system can be relatively simple. The flow of revenue and expenses is recorded by a daily summary of cash receipts, a monthly summary of receipts and a monthly disbursement journal (such as a cheque book). This system is entirely adequate for tax purposes for most small businesses.
As mentioned earlier, there are various accounting packages designed specifically to help small businesses manage their accounts and bookkeeping system. The following is a guide on what to look for when selecting an accounting package.
Choosing your accounting package
Accounting systems are not just designed to report your taxation obligations. They also provide you with information for planning, budgeting, stock control and comparing predicted financial outcomes with actual performance.
The best accounting records system for your business depends largely on the type and size of your business, whether you will have any employees and who does the accounting.
The information these systems provide is also very “user friendly”. All these software packages cover a wide range of functions. You just need to choose which one suits your needs the best. EBC has information on the different products available on its Web site.
The Australia Tax Office (ATO) also released a small business accounting/business records package called E-Record, which is designed to help small businesses keep records and comply with GST record-keeping obligations.
While the ATO encourages the full use of commercial business/accounting software packages, it developed the free electronic record keeping E-Record package to make the process simpler for small businesses.
Whatever the system you choose it must record data accurately and provide data to produce your accounting information. It is recommended that your accounting software should have the following operating characteristics at the very least:
All money, including petty cash, goes in and out of the business, through the bank account
The system should leave a clear “paper trail” from the source documents to the final summaries
It should clearly define the who, what, when and where of your accounts
It should be as simple as possible while still being able of giving you a comprehensive picture of your business
It should keep your business and private finances separate.
