What ties all businesses together, no matter what they deal with? Accounting, of course – it’s literally the backbone of every business. Solid, professional accounting gives a business a clear image of where it is at this moment, and lets the financial managers make informed choices on the future of the business. Accounting is also a profession that dates back literally thousands of years. Evidence of accounting procedures even date back as far as the days of the Pharaohs and Ancient Egypt.
The root of accounting actually is bookkeeping – no real surprise there, though many people don’t think about it much. What a bookkeeper does is track all of the money that the business handles, both incoming and outgoing. A bookkeeper ensures that the ‘books’ are balanced properly, and the records are clear and in order. A bookkeeper also handles information regarding payroll, bank statements, ledgers, and even information regarding real estate and investments the company itself has.
Another aspect of accounting is auditing, which protects the employees, owners, and investors of a company from any sort of accounting fraud or ‘mistake’. An audit is usually performed by an outside company to maintain a lack of bias. What an accountant does during an audit is go through all of the financial records of the company, including the ledgers, to figure out an accurate financial picture of the company. If the ledgers the company holds don’t match the bank statements, then the accountant realizes that there’s something wrong – and it’s their job to figure out what. Sometimes this means discovering that someone has been helping themselves to company funds, but other times can just be correcting a harmless error.
Yet another part of being an accountant is compiling and analyzing the company’s financial situation, and creating reports based on this to be distributed throughout the company. With these statements, along with personal dealings, the accountant can give recommendations on investments, if the company can afford the direction it desires to go in, and more. Part of this also includes reporting to various government agencies.
So, how many accountants does one company have? It depends on the company, no surprise there. Most of the time, the main accountants are certified public accountants, who have to pass a test given to them by the state in order to work as an accountant. A business will often also employee bookkeepers, and the accountants can oversee accounting training. Most of the time, a single accountant will oversee the entire department – and this role is vital to the company, as this is usually the person that meets with investors as well as the companies head, and is responsible if anything goes wrong.
Well, reconciling is a pretty basic accounting procedure where the accountant’s records are compared with the bank statement of the company to see if everything ‘checks out’. Sometimes, a discrepancy is apparent, but it’s only because of the time difference – something hasn’t been recorded yet, or things have been recorded on one but not the other – that there’s an issue.
Sometimes if an outside accounting is reconciling, they won’t realize that the business is using a system different from GAAP, or the generally accepted accounting principles. The majority of businesses do follow GAAP (There are books upon books about the GAAP system), so much so that it’s presumed unless stated otherwise. If these principles aren’t used, it can be very easy for the person reading the documents to not understand what they’re looking at, or worse – presume they know and report something incorrect to the company.
Think of GAAP as the standard of standards. No one really uses anything else – and not disclosing that it does makes the company legally liable for any misunderstandings associated with it. After all, it’s not like someone just tossed together the rules of GAAP in a night and said ‘I guess this works’!
But it’s not all cut and dry. The G in GAAP does stand for general, and you have to realize that these guidelines can be open to interpretation. Sometimes this can lead to creative accounting, which I’m sure you’ve heard of before.
Creative accounting, or massaging the numbers, is when a business pushes the numbers a little to make the company appear more profitable on paper then it is in reality. It’s never right, but this isn’t always a serious issue. Not unless it gets out of hand. Because this sort of behavior can lead to accounting fraud, or cooking the books (A little salt, some basil…).
The end result of accounting fraud isn’t good for anyone. Just look at the news – what happened to Enron was accounting fraud, and you need to consider that massaging the numbers a little could be the first step to something worse.
A common question to those new to the world of nonprofit organizations is how much accounting and bookkeeping is really necessary for charities, and churches. My answer? It’s more vital than if you were starting your own business. It’s absolutely critical for executives and directors to have at least a basic understanding and skill in financial management, because expecting others to manage it for you isn’t a good option – it’s asking for trouble.
Having the basic understanding of bookkeeping and financial management ensures that the books are always reliable, and being able to generate financial reports and analyze those statements, will give you a deeper understanding of how you’re doing on many different levels.
The financial management you’re going to be getting into with a nonprofit organization is basically like any other companies. Preparations for a third party audit, basic methods of internal controls, a firm grasp of a solid accounting system, budget cycles and annual filings… this is all indispensable to your board of directors, and audit committee, not to mention the overall financial well-being of the organization.
Because each organization is different in the financial issues they fast and the fund-raising methods they have, every organization will be treating their reporting and statement creation a little bit differently. Different situations calls for different analysis of different elements – not being able to create the reports needed because of a lack of accounting structure can be very bad. These reports show if the organization itself is financially stable, what financial obligations it’s facing, how much it’s spending on staff, as well as recent financial changes the organization has experienced.
What sort of reports would be needed by a nonprofit organization?
What’s Common Monthly:
- Balance sheet, or statement of position
- Income verses expenses sheet, showing actual, up to date information
- Strong report showing tax and financial highlights, including grants received and short term loans. This report is essential for managing cash flow
What’s Common Quarterly:
- Detailed fund-raising reports. These should include status reports of foundation proposals and actual vs. projection regarding donations
- Cash flow projection
- Fee for service report, which details fee-paying clients and revenue
- Payroll tax report
What’s Common Annually:
- Federal forms, which include state reports, schedule A, and 990
- Statement of activities
- Statement of position
- Income statement for each and every program
- Draft of financial statements for the year
- Audited financial statements for the entire organization
- Management letter from the auditor
Don’t be daunted, or afraid. Bookkeeping isn’t scary – it’s just keeping track of all of your expenses, as well as your profits, as well as making sure everything is in the right place, and that it’s all organized.
Bookkeeping doesn’t have to be scary. Here are the basics of bookkeeping to help you get your foot in the door if you’re thinking of tackling your business’s records.
Always have the Proof
This is something many people forget, but it’s so obvious – you always have to make sure that you get receipts for any business related expense. If you don’t have the receipt, then the government won’t allow the expense! Anything not backed up on paper is automatically a personal expense, and taxable to you. It doesn’t matter if it’s small or large, every single expense needs a receipt.
To keep track of your expenses, you need to make sure that they’re entered properly in your bookkeeping system. Don’t have a system? It really can be anything – you can use a computer program specifically for bookkeeping, like Quicken or Simply Accounting, or if you know what you’re doing, just using a simple Excel spreadsheet can work.
If you’re just starting out, using software is the best option, as it streamlines the process a lot. Remember that it also depends on the size of your business – if you have $1 million in sales, you’re probably too big for a simple spreadsheet. And you don’t need $1,000 software if it’s just you!
Keep it Balanced
Making sure everything is balanced is vital to your entire business. Your bank balance entries in your bookkeeping system must match your bank account statements. This is how you know if you’ve somehow missed entering something in – if it doesn’t match, something isn’t right.
With cash transactions, remember that they should be entered into a separate ‘Cash’ account, just like it would be treated at the bank. Always keep the receipts for your cash transactions as well, because it’s just another part of keeping track of everything.
You should always have a separate business and personal account as well. The IRS has rules against mingling accounts, and it makes everything so much easier when it’s separate!
Debits and Credits
If you don ‘t know the debits and credits system, it’s going to take a lot more room then what I have to explain it all to you. The concept is so confusing, even the pro’s get confused now and again.
Basically, what I mean with this point is to just understand the concept of costs and revenues. Any cost is something you’re paying for, and any revenue is something that is coming into your company. All of this is without taxes, because they should be tracked separately.
The expenses of starting a business are huge, and most small businesses just starting out barely get by as it is. The idea of hiring an accountant full time to handle their records isn’t something they can budget. Normally, the owner hires a bookkeeper who is basically the accountants ‘side kick’, with the accountant himself stepping in once a month to ensure that everything is good.
If you are indeed starting out, the idea of even hiring a bookkeeper seems expensive. Think of this article as a to-do list as a bookkeeper. Why hire one when you can do it yourself until you really get your business moving?
The Very Basics
Like most people who are starting a business, you probably have one thousand and three things going on inside your head of how to run your business best. You have so much to do that you just don’t want to deal with the little things, like keeping records of exactly what was spent where, and when. You want to get on it now, and really start to make money.
Slow down a few steps – this isn’t a race, and in the business world, there is no finish line. If you don’t plan your bookkeeping, and figure out exactly what financial aspects of the business you want, and need, to keep track of, you’re going to find yourself in six months not knowing if your business is wonderfully successful, or if it’s failing miserably!
When properly completed, bookkeeping can and will give you an exact measure of how well you’re doing in your business. It provides all sorts of valuable information so you can see your financial success, and make corrections to improve any short coming the business might be having.v
Basically, bookkeeping is your best friend for managing the financial aspect, so don’t think for a second you can put just a few minutes into it and be done. The best thing, if you’re going to be your own bookkeeper, is to set up a system with your accountant before you ever open your business doors or make your first sale.
What Accounting Method is best?
There are two basic account methods that you’re going to have to choose from when you decide on your bookkeeping system – cash based, or accrual. The main difference in these two is when you record your purchases and your sales. With accrual accounting, you make your records when it’s completed, no matter if cash is exchanged or not. However, with a cash based accounting, you only make your records when money changes hands.
Let’s try a simple example. You purchase software, but you don’t actually have to pay for it for a month. If you were using cash based system, you wouldn’t record this transaction until you paid that company in a month. However, with accrual accounting, you make your records when the transaction happens, and you also record the future debt.
There are so many different tips on the basics of book keeping for new business owners, it’s hard to figure out what’s good, what’s bad, and what’s not worth your time looking. Let me help – these are our top three basic book keeping tips, and they’re all important for different reasons.
1. Keep Your Business and your Personal Separate
If you haven’t done this already, then you need to set up a separate checking and savings accounts specifically for your business. Many new business owners don’t realize how important this really is, and how much of a difference it’s going to make.
If you’re doing your own book keeping, as your interest in this suggests, you probably think that the entire idea of keeping your personal records separate from your business records is just going to give you one big headache. But trust me, it’s going to save you time – when you go to gather all of your information at the end of the year for tax purposes, having everything separate right from the start will make the entire process run smoother.
Signing up for online banking, as well as getting a paper statement every month, can save you time. It’s very safe to check and bank online, and you can do things like pay bills and look over statements with a few clicks. While you should always have paper information, too, going online makes the processes of banking more efficient
As a personal recommendation, having your personal accounts in a completely different bank then your business accounts can be easier. You always know what statement you’re looking at, and you don’t have to worry about confusing things. While this is obviously your choice, it can make things easier.
2. Find a Good Software
Do your really want to spend all the time it takes to manually write out your bookkeeping? Most people don’t – using a computer software program specifically for bookkeeping can make your life a lot easier.
There are a lot of great programs out there, but for your business, there are a few that I can tell you from personal experience that won’t help – MS Money being one of them. While it’s a great program for personal finances, it doesn’t do well with handling a business.
One mistake some businesses make is going with Quicken, which is oversimplified. While it’s an alright program if you’re doing your personal finances, or if you’re keeping things small, as you grow, it won’t be a good program to grow with you.
3. EIN is your Friend
Getting a federal tax identification number, or an Employer Identification number, is a great safety precaution, and something most small businesses don’t think about. It doesn’t matter if you have an employee, or plan on hiring one anytime soon.
If you don’t have one, you have to use your personal SSN for all of your business matters – and having that number just laying around isn’t a good thing at all. An EIN number protects you and your family.
Applying is easy. The fastest way is to go online and apply through the IRS. It’s easy, won’t take you very much time, and can save you a fortune.
1. Due Date Reminders – This is something a lot of business owners don’t do, but really need to – having a payroll tax due date reminder can save you a lot of time and energy. No matter if you have a payroll service preparing your payroll tax returns, of if you’re doing them yourself, a check off list of all the reports, as well as a due date reminder customized to your business’s specific needs, can save you a lot. Consider including things like: Due date, Report number, Time period, Government agency.
2. Audit Trail – This sounds complicated, but trust me, it’s not – basically, an audit trail is a record of every invoice and check in numeric order. Making sure that you never skip a number can really mean the difference between a good paper trail and one that’s missing a vital part. Record every voided check with the others, just make sure to make note that it’s ‘voided’!
3. Purchase a Deposit Ticket Book – If you’re not using a deposit ticket book, you’re probably having problems handling your bank deposits – or, you’re doing it in a way that’s harder then it needs to be. Most of the books comes with 50 top copy’s and 50 bottom copy’s – the white top copy is the original that you give to your bank, and the bottom yellow copy is what you keep for your records. Nothing gets lost, and a small order of 200 deposit tickets could easily last you 2 years or more, depending on how often you make deposits.
4. Consistency is Key – This should be a no brainer, but many people like to switch things up and try something new. With this, you lose money by wasting time. When you’re keeping your books, make sure to use the same headings and columns throughout the year – don’t get the brilliant idea to start labeling something differently halfway through. You’re going to give yourself, and your accountant, a headache in the long run if you do, and end up paying him for more time spent on your books!
5. Bank Statements – Requesting a statement with a month-end cut off date when you first open your business checking account can save you a lot of time, frustration, and headaches.
The key with this really is to remember to review it every single month, not just toss it unread into a filing cabinet. Go over everything closely, before your bookkeeper or accountant, and make sure there are no unauthorized checks or suspicious spending. You may trust these people you work with, but knowing for sure can save you a lot of time.
Resist the urge to go paperless and keep information only stored online. Having it in paper is solid, unchangeable, and makes a world of difference.
6. Keep Good Records – Duh! This one is the most obvious on the list, but constantly needs to be repeated! Keeping good records of your businesses financial dealings does make a difference. Bookkeeping should be a top priority for you, no matter if you’re afraid of what the numbers are telling you or not. Solid bookkeeping is like the glue that holds your business together. You just won’t get very far without it!
I’m going to be honest. When compared to other accounting tasks, bookkeeping probably ranks as one of the most boring to do. Who really wants to sit and compile information that’s already there of various transactions into one certain format, and then spend the time going over and ensuring everything is recorded, and the sheets total up right? It’s a headache, even if you’re 100% sure what you’re doing. A solution many business owners have found to be a favorable one is hiring the services of a bookkeeper.
It’s a solid fact that the survival of your business greatly depends on the accountants, and with that known fact, you need to realize that bookkeeping is a firm step towards increasing your profits. Without sound bookkeeping, you’re lost when it comes to your company’s true financial situation, and the bottom line with your business should be your finances. If you cannot keep clear and detailed records for any reason, looking into bookkeeping help is something you should consider.
There are numerous firms all over that offer bookkeeping help in several different forms. These firms are usually highly efficient and surprisingly cheap – much cheaper then you might think, and when you figure out the time you’re spending on your books, it often is cheaper for you to hire someone to help.
There are so many different advantages to getting bookkeeping help. Hiring from a firm means that you don’t have to pay them like you would pay an employee, and you don’t have to worry about any of the bonuses a full time employee would ask for. As far as professionalism goes, most will be even more professional than if they were employed directly by you, because they realize that they’re working with someone else. You really can get top quality service.
Another benefit of hiring from a firm is, you don’t have to worry about choosing someone. Many companies find it difficult to keep a full time employee happy, when their job is to just go over records all day long. There is very little creative thinking that goes with this, so productivity is often low.
Considering hiring help? Take into consideration some very important things before you do!
You trust a company with your finances. This means that they need to have what it takes to handle the responsibility. Before you hire a firm, look closely at their profile, work experience, and past clients. Don’t just base your choice on fees, because there might be a reason a certain company is charging a little less then another.
This isn’t something you can just toss around, so compare services provided before choosing, and see if you can’t get a personal recommendation or two from other business owners before you pick someone. If you can’t, do your research and rely on the BBB (Better Business Bureau) to help guide you.
Book keeping is normally performed by a bookkeeper; you shouldn’t confuse bookkeeping with accounting – because they are two very different things! Most times, the accounting process itself is done by an accountant – accountants create reports from the records of the company itself. These records are usually prepared by a bookkeeper.
The most common methods of book keeping are single entry and double entry systems. These are seen by most people as ‘real’ methods of bookkeeping, but don’t get overwhelmed – any process that involves keeping the records of a business’s financial transactions classifies as book keeping.
Many small businesses tend to neglect their book keeping, feeling that it’s more important to be out of the office generating new sales then sitting inside adding credits or debits to a sheet, or setting up what they see as an unnecessarily complex book keeping system
Don’t fall into this trap – don’t think that book keeping is something you can ignore, because it’s certainly not. Appreciating how book keeping really influence your business can make it more of a priority in the future.
Book keeping is simply the recording of your business’s financial transactions. Book keepers basically keep track of all things dealing with the finances, including receipts. Recording the entries chronologically, they make sure that all cash transactions, sales, purchases, and more go into a journal, or ledger.
This information then goes to an accountant, who usually processes it, analyzes what’s there, and produces a monthly financial statement that helps you get a better idea of where you stand.
Book keeping doesn’t contribute directly to your profits – no one is going to pay you to do your books – there are numerous reasons why you should make book keeping a top priority.
- If you’re going to be relying heavily on outside financing, you’re going to need detailed, and accurate, records of all of your businesses finances. Lenders and investors alike need this information to measure how much risk they’re putting into this, and if you don’t have the information, you won’t get the money.
- At the end of the tax year, when you go to figure out how much you owe the IRS in taxes, you need to look at an accurate assessment of how much you’ve made. This can’t be done without proper book keeping. Moreover, you need to be able to show proper receipts to verify information regarding tax deductions. If you don’t have this information and you get audited, you can suffer huge fines.
- Looking at your books is like going to the doctor for a checkup. With an up to date and accurate ledger, you can see who is past due on payments, who has outstanding credit, what is owed to you, and what you owe – right there. The financial reports that come from good bookkeeping help you keep in line with a budget, judge what you’re grossing in income, and will help you determine how healthy your business is, financially speaking. Without it, you have no way to anticipate any cash flow issues.
Uncertain of where to begin? Not sure the difference between a debt and a credit? We’ve got you covered on the basics of basics when it comes to bookkeeping, and understanding your debits and credits.
First, throw out the traditional definition of debits and credits. No, a debit isn’t a deduction, and a credit is not an increase. They’re the names of the columns on your bookkeeping ledger (99% of the time, debit is on the left, with credit to the right).
In bookkeeping, or double entry accounting specifically, the total of each column must equal the other. Basically, the total of all of the debits has to equal the total of the credits – ensuring this equality; you can eliminate any basic arithmetic error.
When making an entry, a bookkeeper makes an entry into the credit side of the ledger as well as on the debit side. Everything is in the positives (No negative numbers here).
But what goes where, you ask? Basically, the accounts that are your money increase with debits, and decrease with credits. Every other account increased with credits, and decreased with debits. It’s a bit confusing, but as soon as you will start to do bookkeeping transaction as faster and better you will understand those terms.
So… what are ‘your money’ accounts, anyway? They’re the actual money, expense, and equipment and inventory that you have right now. Any assets are with this, as well as cash, and assorted expenses you’ve incurred.
Let’s try a simple example, shall we? You open your own business with $20,000. Your very first bookkeeping entries would be to debit the account ‘Checking Account’, and credit the account for paid in capital.
Now, you’ve made a sale. Let’s say… $300. Not bad, for your first sale. You were paid in cash, which you obviously deposited in the business checking account. If you didn’t, there’s another issue entirely we should discuss. Your bookkeeping entries for the day would be to credit the Sales with $300, and to debit the checking account with $300.
Now, it’s the end of your very first month in business, time to pay the gas bill. In the bookkeeping ledger, you would debit the expense account for the bill, and credit the checking account. Get it?
Okay, probably not. Bookkeeping isn’t easy to get on first try, so don’t feel bad if you’re a bit lost. Take a look at your bookkeeping ledger closely to understand how it works, and remembers the basic principles – debits increase, credits decrease, when we’re dealing with expenses, assets, and your money. If you remember that, you’re on your way. The more you do it, the easier it will be!