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THE SIMPLEST RECORDKEEPING SYSTEM
For The Very Small Business
If you are starting your own business, or have recently done so; and if your business is small, you may not need an elaborate accounting system. You may not even need Quicken, which is a popular checkbook program, or QuickBooks, which is a popular, "simple," entry-level bookkeeping program for personal computers. But, what you do need to do is to write down the cash you receive and the cash you spend. And in a timely manner.
Remember: The IRS wants to know how much money you earned (your revenue). You, on the other hand, want to know how much you can deduct (your expenses) from the revenue so as to show as small a profit on your tax return as legally possible. And, you too, may be interested in how much money you earn and how much you spend in your business. You may want the difference (your profit) to be large. In any case, you, and possibly your banker, may want to know how your business is doing. To put it simply: you need to keep records of your income and expenses for the IRS, for your creditors, and for yourself.
The following discussion describes probably the simplest recordkeeping system that a business person can use. Even if you use an accounting program such as QuickBooks, MYOB, Peachtree, etc., the principles are the same.
CASH RECEIPTS
The cash you receive can be written down on a piece of paper. Or in a computer spreadsheet. Or in an accounting program. Generally the place you write down this information is called the Cash Receipts Journal. In a computer accounting program, the activity is called "Enter Cash Receipts".
At a minimum, the Cash Receipts Journal contains the following information:
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Date payment received
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Payer (your customer)
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Amount received
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If you had sent an invoice to your customer billing her for goods you shipped or services you provided, you might add a reference to that invoice by listing the invoice number or invoice date as part of the above entry in the Cash Receipts Journal. If you bill customers and collect later, then you need a place to write down those billings. This place is called the Sales Journal. See the discussion in the paper titled "One Step Above the Simplest Recordkeeping System."
CASH DISBURSEMENTS
The cash you spend can be written down on a piece of paper. Or in a computer spreadsheet. Or in an accounting program. Generally the place you write down this information is called the Cash Disbursements Journal. In a computer accounting program, the activity is called "Write Checks," "Enter Credit Card Charges," or "Enter Cash Payments."
At a minimum, the Cash Disbursements Journal contains the following information:
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Date payment made
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Payer (your vendor, supplier, employee, subcontractor, creditor, etc..)
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Amount paid
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Check number if paid by check
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Credit card issuer if paid by credit card
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"Cash" if paid by cash
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BRINGING IT ALL TOGETHER
At the end of the year, or at the end of the quarter or the month if you so desire, you need to do a few things with your well kept Cash Receipts Journal and Cash Disbursements Journal.
Total the journals.
Write the totals on a piece of paper, as follows:
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Cash Receipts total
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Cash Disbursements total
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Difference.
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The Difference is your Profit.
Sort of.
COMPLICATIONS
There are a few complications that I need to mention for the sake of completeness. Some of the Cash Receipts may not be income. Some of the Cash Receipts may have been loans to you, transfers of money from other accounts, gifts, or something else. These non-income types of receipts should be deducted from the total of Cash Receipts so as to arrive at the amount of business revenue or income.
Similarly, some of the Cash Disbursements may not be business expenses. These non-expense types of disbursements may have been loan repayments, transfers of money to other accounts, or personal expenditures. These non-business expense types of disbursements should be deducted from the total of Cash Disbursements so as to arrive at the amount of business expenses.
Now, the difference between the Cash Receipts and Cash Disbursements, as adjusted for the above items, is your profit.
Or just about.
There may be additional factors to consider, such as Depreciation on property and equipment used in the business, interest portion of debt repayments, and possibly other items, depending on the nature of your business. If you buy or make merchandise for resale, Inventory is a factor that has to be taken into account to compute the Cost of Goods Sold. And, the Cash Disbursements should be broken down into a few categories that indicate the nature of the disbursement, such as, Office Supplies, Rent, Wages, Materials, etc. Breaking down the expenses into categories is called "Distributing the Expenses" or "Spreading the Expenses". If you are not using an accounting program, spreadsheets are useful for this purpose.
The Complications are not as bad as they may seem. However, there is a reason why there are accountants and accounting programs. Accountants deal with those complications. You may want to see one. Or, if your business is really simple, some, or most of them, may not apply to your small business.
CONCLUSION
Writing down your Cash Receipts and Cash Disbursements in an orderly manner takes you a long way towards determining your profit and providing information for the IRS and your creditors. And yourself.
Copyright © 1999 Ira M. Freed |
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