BizMove Financial Management

Accounting Bookkeeping: Effective Bookkeeping Factors


BizMove business management guides

 

Effective Bookkeeping Factors

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.

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.

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."

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