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Basic Accounting Methods


Contributed by Vickey Boatright from Basic Accounting Help.com




Starting a small business is an exciting and slightly daunting task. Below are some simple dos and don’ts to keep in mind while starting your small business.

Do: Decide which form of accounting your business will use. There are basically two types:

THE CASH METHOD

Most small businesses that do not have to keep track of inventory such as a service business...use the cash method. Under the cash method, you do not record your income until cash (or check) is actually received from your customer or affiliate and expenses are not recorded until you actually pay for them.

THE ACCRUAL METHOD

Under this method, income is counted and recorded when the sale occurs and expenses are recorded when you receive the goods or services.

Accrual basis accounting is more widely used among “bigger” small businesses...especially those with inventory and those who extend credit to their customers.


Do: Decide what type of bookkeeping system you are going to use in your small business. Single entry bookkeeping can used by small businesses where a balance sheet is not required for financial control or tax purposes. With this system you essentially you have two lists, one of income received and one of expenses incurred.

Double entry bookkeeping is required for all businesses that must produce both a profit and loss account and a balance sheet. It tracks your income and expenses AND your assets and liabilities. In a double entry bookkeeping system, at least two entries are made with every financial transaction recorded...a debit and credit. Each transaction must balance each other.

To decide if a single entry or double entry bookkeeping system would be best for your business...consider the type of business you own. A small sole proprietorship or home-based business may not require a double entry system for recording business transactions. (money owed to your business by your customers)or accounts payable (money owed by your business), you may want to consider utilizing a double entry bookkeeping system.


Do: keep your business records separate from your personal records. You should set up a separate bank account for your business even if you are a sole proprietor. Also, keep all your supporting documents such as receipts and invoices in a safe place. You can save them in files labeled monthly or by categories. Research your country’s laws regarding the requirement of business records retention.


Some major don'ts are:

Comingle your business assets with your personal assets.

Rely on verbal agreements on any important business transactions.

Wait to establish credit sources until you have a need for it. Start building a relationship with a lending source immediately.

Delegate the authority to sign your business checks to anyone.


In conclusion, as a business owner it is imperative for you to gain knowledge of accounting in order to properly manage your business. Even if you hire an accountant to manage your finances, you must have some accounting knowledge to talk intelligently with your accountant and reduce the chances of being taken advantage of.


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