Small Business Bookkeeping Overview:
All business owners have been overwhelmed by small business bookkeeping at one time or another. But bookkeeping is straight forward, logical and will help you reach 2 basic goals:
1- Keeping track of money received.
2- Keeping track of money paid out.
It doesn’t matter if you’re keeping a computerized or a manual system of bookkeeping. As long as you have a well kept record that will help you analyze your business and help you make decisions.
Your business will not always be small – so expect the quantity of records and how you process the records to increase. Now is a good time to talk about the cash method versus the accrual method of small business bookkeeping.
Under the cash method, you record income in the year in which it is received and you record expenses as they are paid in the year in which you actually pay them.
Under the accrual method, you record income in the year it is incurred, regardless of when you receive payment from your customers. Similarly, you record expenses in the year in which you incur them, regardless of when it is paid. In the accrual system you will always carry a balance owed from your customers (accounts receivable) and you will always have a balance due to your suppliers (accounts payable).
How to begin?
Your small business bookkeeping needs a place to start, and a perfect place is at the beginning. We will cover:
- Chart of accounts and its definitions.
- Financial statements, the income statement and the balance sheet.
Chart of accounts is the heart of bookkeeping. You have to start with an outline of how the information is organized. That outline is called the chart of accounts. It is the framework upon which the financial statements are built.
A chart of account uses a numbering system to organize the data entry process. It is made up of a 4 digit number – the first number indicated the category the account belongs in and the 3 digits that follow put the accounts in a numeric order. As your business develops you may want to get more intricate with the accounts and further refine this system, but the basic outline is the same.
The income statement includes the following accounts:
4000 – 4999 Income
5000 – 5999 Expenses
The balance sheet includes the following accounts:
1000 – 1999 Assets (what the business owns)
2000 – 2999 Liabilities (What the business owes)
3000 – 3999 Owner’s Equity (Owner’s investment in the business)
The generally accepted accounting principles (GAAP):
Assets – Liabilities = Owner’s equity
$350,000. _ $250,000. = $100,000.
1000-1999 – Asset accounts comes in two forms, current and long term assets. Current assets are those you can convert to cash within one year. Ex: inventory (product you have for sale), accounts receivable (invoices you have send your customers and awaiting payment.)
1000 CURRENT ASSETS
1100 Business bank account
1200 Accounts receivable
1300 Product inventory
1499 TOTAL CURRENT ASSETS
Fixed assets are those that will remain in your business more than one year. Ex: equipment, tools, and computer systems. The value that’s recorded is the book value. What it cost you to purchase that asset. The assets do not appreciate in time, on the contrary, they depreciate in time and that depreciation amount is recorded as depreciation expense for the company, reducing the book value of that asset each year.
1500 LONG TERM ASSETS
1550 Equipment $150,000.
1552 Accum.Depr. Equipment $8,000.
1555 Net: equipment $125,000.
1599 TOTAL LONG TERM ASSETS
2000-2999 – Liability accounts, like assets, come in two types, current and long term liabilities. The one year rule applies. Current liabilities are those that are paid within one year.
2000 CURRENT LIABILITIES
2100 Accounts Payable
2200 Payroll Taxes Payable
2250 Sales Tax Payable
2499 TOTAL CURRENT LIABILITIES
Long term liabilities are those that remain on the books for more than one year and it is generally those that you make monthly payments on.
2500 LONG TERM LIABILITIES
2600 Bank Loan
2700 Credit Card
2999 TOTAL LONG TERM LIABILITIES
3000 – 3999 – Owner’s equity is the owner’s claim on the assets of the business. It represents the assets that remain after deducting liabilities plus the owner’s contribution to the business.
3000 OWNER’S EQUITY
3100 Investment by Owner
3200 Current Earnings
3999 TOTAL OWNER’S EQUITY
The numbers up to now are all what you call a balance sheet accounts. The information here will show up only on your balance sheet. These accounts are related to your income statement and that’s what we are going to talk about next.
4000 – 4999 Are income generated through sales. As you can see, you have a thousand accounts available to you; therefore, you can make your sales categories as detail as you want.
4000 INCOME
4100 Desktop Computers
4200 Laptop Computers
4300 Computer Parts
4999 TOTAL INCOME
5000 – 5999 Cost of goods sold, wages and administrative expenses.
5000 COST OF GOODS SOLD
5020 Cost on Desktop Computers
5030 Cost on laptop Computers
5040 Cost on Computer Parts
5099 TOTAL COST OF GOODS SOLD
5100 WAGES
5120 Staff Wages
5130 Management Wages
5140 CPP and EI Expenses
5150 WCB Expenses
5199 TOTAL WAGES
5200 ADMINISTRATIVE EXPENSES
5260 Accounting & Legal
5270 Advertising and Promotion
5300 Bank Service Charges
5320 Bank Interest on Loan
5500 Business Insurance
5700 Office Supplies
5750 Rent
5800 Telephone
5850 Utilities
5950 Vehicle Fuel
5952 Vehicle Repair and Maintenance
5955 Vehicle Insurance
5987 Depreciation Expense
5999 TOTAL ADMINISTRATIVE EXPENSES
Review the income statement and balance sheet to get a feel of how the accounting equation and chart of accounts relates to each statement. Click on the link below to see a pdf version of Income Statement and a Balance Sheet.
Income Statement – Balance Sheet
On another note – forget the word miscellaneous was ever invented. Everything is something and should have a place on the chart of accounts, if it does not, you should not be spending money on it.
The equity section of the balance sheet changes depending on the structure of your company – sole proprietorship, partnership or corporation. Talk to your accountant to find out the best way to set this section up. The income statement and balance sheet example I give for these equity accounts is for a sole proprietorship.
And of course, all bookkeeping boils down to “how much income tax do I have to pay.” There are some tax rules to pay attention to when creating the chart of accounts- for example, where you might be tempted to lump some all your vehicle expenses into one account, not a good idea, because you can only deduct the business portion of the vehicle use. So separate the accounts like I have done on the income statement example. Same goes with your home office – separate the utilities, house insurance, mortgage interest and property tax. You will be happy you did at tax time.
Happy small business bookkeeping,
Baunoo Shean
