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Source: Small Business
Management
Accounting bookkeeping is
often viewed with disdain. It is not uncommon to hear people refer to the process of
records keeping as a "necessary evil." More and more, people in business,
industry and government speak of reducing the burden of maintaining detailed records, and
simplifying complicated governmental records.
Importance of
Accounting Bookkeeping - why keep records
While such concerns are important, they should not mislead you into believing that the
fewer records you keep, the less paperwork will burden you. Whether these records are
burdensome or not, a well run business needs to maintain them. Inadequate records may well
be detrimental to the health of a business.
In our economic system, one of the primary reasons for starting and operating a
business is profit. Profits from a successful business may be used for expansion of
business activity, thereby creating more jobs; to increase future profitability; and to
reward owners for the financial risks they take in running a business.
bookkeeping
provides the basic information needed to determine the business's profit (or loss).
Decision-making
Profit/loss information comes from the bookkeeping of a business and is an important
aid in decision-making. Information gathered from a review of the
bookkeeping system
can indicate past trends in a company's operating effectiveness. This historical data can
be used to answer specific questions about the change in profitability over time, the
volume of sales at different times of year, the level of employee turnover, etc. This
historical perspective can be especially useful to the owner/manager in decisions about
future courses of action. Information generated from the records keeping system can provide
a baseline for setting future goals and directions.
Another aid to owner/manager decision-making derived from a good
bookkeeping system
is the ability to compare the business with similar businesses in the same industry; for
instance, to determine how many times a year the inventory turned over and compare that
performance to an industry average. Or a bookkeeping system could be used to determine
a business's net profit as a percentage of sales which, again, could be compared to an
industry average to tell the owner/manager if he or she is doing well or needs to make
improvements.
The value of a good records keeping system is immeasurable. Accurate and timely
information can be used by the owner/manager to make decisions that give an edge in
maintaining or gaining a competitive advantage - more specifically, a good
bookkeeping
system can make the difference between success and failure.
To Accounting Bookkeeping: Effective Bookkeeping
Factors - Top Governmental Regulations
Another purpose for maintaining records - the reason complained about the most - is to
satisfy governmental regulations. A well designed records keeping system will simplify the
process of complying with regulations, provide an audit trail for verifying that specific
transactions have occurred and serve the information needs of the owner/manager as well.
A Record for Others
Yet another purpose for maintaining records is
to provide information for other people. Many small businesses are essentially one-person
enterprises - a single individual is the catalyst for most activity. It is imperative that
this type of business maintain complete and detailed records. If something happens to the
key individual, often no one else knows what has gone on in the past. With no records
system to provide continuity, the business may be forced to close or be sold for less than
it is worth.
Effective Accounting Bookkeeping Factors
Records keeping, as presented in this section, can be defined as the process of
identifying what records need to be kept, how they are entered and maintained, and how
they can be used effectively. A record is defined as basic information which documents
financial, personnel, inventory, supply, or customer activities. This information is
normally recorded as the result of a transaction or event in the course of conducting the
business.
A good records keeping system should be designed and used with the following factors in
mind:
- Simplicity
- Understandability
- Reliability
- Accuracy
- Consistency
- Timeliness
Simplicity
The records keeping system should be simple to use. One of the major reasons for the
dramatic acceptance of personal computers today is the fact that they are very easy to
use. A records keeping system should be designed with consideration for the
employee(s) who
will be recording the information. Complicated forms may be only partially completed and
complicated processes avoided in favor of shortcuts that result in incomplete data. A good
records keeping system should be designed to gather appropriate information as simply as
possible.
Understandability
Ease of understanding is another important attribute of a good
records keeping system.
The system itself, the way to record information, and what the recorded information means
must all be easily understood. Confusion, error, and, obviously, misunderstanding can
result if records that are not clear and concise.
Reliability
"Reliable" has a specific meaning in accounting. The term generally means
that a particular type of transaction is recorded in the same manner each time it occurs,
in keeping with accounting guidelines.
Accuracy
The necessity for maintaining accurate records seems obvious, but cannot be
overemphasized. A common error, for example, when people record numbers is that they
inadvertently transpose them.
Care should be taken to ensure the accuracy of all records. A good
bookkeeping
system will stress accuracy through built-in procedures for checking and rechecking
entries. Methods for improving accuracy include double checking all entries, taking
frequent trial balances, requesting client/customer verification, and stressing the need
for accuracy to all employees.
Consistency
Sometimes there are several ways to record a particular piece of information. Inventory
records, for example, can be maintained on an item-by-item basis, on the basis that the
last item is in the first item sold (LIFO), or on the basis that the first item is in the
first item sold (FIFO). Consistent records keeping means choosing one method for recording
inventory, using it consistently, and not changing it arbitrarily. This does not mean that
you cannot change your approach, but it does mean that changes should only be made for
good reasons and that the changes in the records keeping process should be clearly
identified. Keep in mind that consistent records keeping is essential for comparing records
over time.
Timeliness
Timeliness is an important element in a good records keeping system. Consider the
statement, "I made $5,000." Without the element of time, this statement has
little meaning. Add "in one year" and the statement has more meaning. Or add
"in one week" and the meaning changes dramatically. One consideration of
bookkeeping, then, is time.
The more obvious reason for timeliness is the need of the owner/manager to receive
information as early as possible in order to make decisions affecting the business.
To Accounting Bookkeeping: Effective Bookkeeping
Factors - Top Minimum Records Required
There are four basic records that a business must maintain:
1) Sales Records,
2) Cash Receipts,
3) Cash Disbursements, and
4) Accounts Receivable.
Sales Records
A record of all sales must be kept. If you use a cash register, a combined Sales and
Cash Receipts record may be kept. Sales may result from a single primary activity or may
result from different types of activity and be recorded in sub-categories. For example, a
business might record three kinds of sales: wholesale, retail, and services.
It is important to record all sales as they occur. Remember that a sale may result in
cash or arrangements may be made to receive payment at a later time. In either case, the
sales records should reflect that the sale has occurred.
Cash Receipts
Cash is received by a business at the time of the sale or as payment on account for a
credit sale. In any case, all cash should be recorded as it is received. A small business
without a cash register can enter each transaction in a Sales and Cash Receipts Journal
showing the date, name, invoice number, and the amount of the sale.
Deposit all cash receipts for the day in the bank. Do not pay out small amounts
directly from cash receipts. Instead, establish a petty cash fund to pay small amounts not
covered by invoices. By depositing all cash receipts daily, you have a basis on which to
verify the daily balance in the cash receipts book.
Cash Disbursements
Just as all cash receipts should be deposited, nearly all disbursements should be made
by check. The petty cash fund, as stated earlier, should be used to make payments only on
small items.
When writing a check, use an invoice or bill to support the check. In the checkbook,
record the purpose of the check, the date, name, check number, and the amount of the
check. Bank charges should be recorded in the same manner as a check except, of course,
they would not have a check number.
Accounts Receivable
The fourth basic record to be maintained is for credit sales. If a business provides a
product or service to a customer and agrees to accept payment at a later time, it has
created an account receivable. An account receivable record normally contains information
pertinent to billing and receiving payment from a customer.
Every effort should be made to ensure that accounts receivable are kept current. Bills
should be prepared promptly and mailed to correct addresses. At the end of each month,
accounts receivable should be "aged." Aging means listing all accounts unpaid
for 30 days, 60 days, and over 6o days. Special action should be taken to collect older
overdue accounts. Extraordinarily large accounts should be watched carefully.
For delinquent accounts, try to get the customer to promise payment on a specific date.
Then, if payment is not made on that date, contact the customer to find out why payment
was not made. Be persistent, it's your money.
Records Keeping Process
A small business involved in ordering and selling merchandise should have a
records keeping process that reflects the flow of that merchandise through the business.
Ordering and Receiving
The process begins when a business orders merchandise. An order can be written or oral.
Oral orders should be documented with a written record. Copies of all orders should be
retained.
When merchandise is received, it should be checked for quantity and condition, checked
against the packing slip, and checked against the original order. Any discrepancies should
be noted and the supplier notified as soon as possible.
The merchandise is then recorded on a Receipt Log listing quantity, description, and
source. The Receipt Log serves as the basis for additions to the Inventory List, which is
a complete record of all goods available for sale.
When an invoice (bill) is received from a supplier requesting payment, the invoice is
checked for accuracy and verified against the Receipt Log and the original purchase order.
A check should then be written to the supplier for the appropriate amount.
Sales
As sales of merchandise are made, goods are removed from inventory. If the merchandise
consists of large, expensive items (e.g., automobiles, refrigerators, etc.), the inventory
list may be maintained on an item-by-item basis with a sale resulting in the immediate
removal from the inventory list of the item sold. On the other hand, many businesses sell
a large number of inexpensive items; a small grocery store, for instance, might sell 200
boxes of cereal. For these businesses a periodic physical count of merchandise available
for sale is the only realistic way to keep track of inventory.
Sales can be cash or credit. In either case, the sale is recorded at the point of sale.
The sales slip serves two primary purposes. First, it is the original record of the sale
used to record that transaction in a journal. When a cash register is used, the cash
register tape and total at the end of the day serves as the sales slip. Second, sales
slips are used to reduce the inventory listed, at least when a perpetual inventory (item
by item) method is used.
Sales for cash are recorded as Sales and as Cash Receipts. Sales on credit are recorded
as Sales and Accounts Receivable. Credit sales require that a customer credit account be
established and maintained.
Completing the Cycle
The reduced inventory resulting from sales signals the need to order more merchandise.
Purchase orders are written and sent to suppliers and the cycle of merchandise flowing
through the business continues.
Much of the process of recording and tracking inventory today is done by computers and
or computerized cash registers. However, these systems are only as accurate as the
information which is entered into them and checks and balances for human error still
exist. By utilizing a computerized system it is possible to know on a daily basis what the
inventory and sales for each item are and to plan for re-orders of merchandise in a more
effective manner. They also provide an efficient method for determining loss by
"shrinkage and theft."
To Accounting Bookkeeping: Effective Bookkeeping
Factors - Top |
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