For many small businesses, the biggest problem is not knowing where to start with business records-so none are kept. The need for income tax information is not the only reason to keep business records. The best reason is for you-the business owner. Good records can provide: An accurate record of the business' financial performance. A vehicle to monitor performance in specific areas. Complete and accurate income tax data. A basis for sound planning for the future. A basis for discussion with partners, potential investors, and lenders.
The key to successful record keeping is a commitment to a good accounting system that grows out of an understanding of its value. Sometimes it is best to start with a modest system that can be improved over time. Choose a system adequate to meet current needs and expandable as your business grows. You may not need an elaborate system for a small business, just one that shows income and expenses and one that you can understand. In part, the type of system you use depends on the characteristics of the business. If you are in more than one business, keep complete and separate books for each.
Business checking account - Do not use your personal checking account for business. A business checking account allows all business transactions to be well documented. If you have a small business with only a few transactions, a combination check/record system is available.
Pay all bills by check - Mark on each check what was purchased. This is your record of having paid bills and enables analysis of expenditures.
Petty cash for small expenses - Use it sparingly. Make sure all expenses from petty cash are supported by documents showing their business purposes. When the petty cash fund gets low, write a check from your business checking account to restore it to the original amount.
Deposit receipts often - Don't keep cash or checks lying around that can invite theft and loss; put the money to work immediately.
Support your entries - Canceled checks, paid bills, duplicate deposit slips and other items that support entries in your books should be filed in an orderly manner and stored in a safe place. Let your bank help you with your records by providing documentation of income through deposits and expenses.
There are two basic types of bookkeeping methods: single entry and double entry systems. Standardized bookkeeping systems can be found in business or stationery stores. Computer record keeping systems are also available. The problems with using these is that you may have a tendency to fill in all of the blanks on the forms even if the information is of no value to you. To save time and money, be certain you record all the information you need and no more.
This system uses a cash receipts journal and a cash disbursements journal in addition to the checkbook. All transactions are recorded in one of these journals. It records the flow of income and expenses and is practical for a small business just starting out.
The cash receipts journal records all the cash you receive. It has columns for various categories of receipts with a line for each receipt, including date, source of cash and total amount. The column categories may be departments or types of merchandise, types of service or whatever classifications make sense for your business.
The cash disbursements journal records the money you spend. It has columns for various categories of expenditures with a line for each expenditure, including date, check number, payee, description of expense and total amount. The column categories may be merchandise for resale, supplies, interest, rent, salaries or whatever classifications make sense in your business.
The choice of column categories in both journals is critical to future analysis. Think ahead to what analysis you want and need when establishing categories. All columns in both journals should be totaled each month with yeartodate totals after each month.
This system combines the single entry system with additional information to provide you with a more complete picture of your business. Double entry systems include information on cash on hand, equity in building, equipment, accounts payable, mortgages and loans.
You should have a double entry system if you have significant accounts receivable, accounts payable, depreciable equipment or inventory. If you envision your business growing rapidly, set up a double entry system from the start. With double entry bookkeeping, use journals and ledgers to record information in accounts that reflect the needs of your business. Each transaction is recorded twice so the system is selfbalancing. To illustrate: You write a check to pay a supplier; in your journals you decrease the cash account and increase the supplies expense account. The total amounts recorded as credits should equal the totals recorded as debits.
If you don't have time or the inclination to learn double entry bookkeeping, work with a professional, at least when setting up your system. It will be money well spent. You may be able to maintain the system once it is established.
Both systems have advantages and disadvantages. Single entry systems are practical and easy for a new small business, but they do not present a complete picture of your business and do not reflect initial investments and actual worth.
Double entry systems are more complete, do a crosscheck of entries, have more features, and are easy to do. However, they require more time to enter information.
Record Keeping for Profit. Cooperative Extension Service, Iowa State University, Ames, Iowa 50011. April 1984.
Information for Business Taxpayers. Department of the Treasury, Internal Revenue Service. Publication 583.
U.S. Small Business Administration. Management Aids, Number 1.017.
Budgeting a Small Service Firm. Phyllis A. Barker. U.S. Small Business Administration. Management Aids, Number 1.010. All SBA
Bulletins are available free from: Small Business Administration, P.O. Box 15434, Fort Worth, TX 76119.
Small business management programs at local joint vocational schools also can provide information and assistance.
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.
Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868