Bookkeeping is the process of keeping track of all your business transactions. If you keep on top of it, and keep it current you’ll always have invaluable information about your business. I know it sounds boring, and it’s going to feel like the last thing in the world you want to be bothered with. But if you keep it updated you’ll always know how much the business is making and if your spending to much money on expenses. It will also help you pay your taxes accurately and on time. Before we start talking about different ways to accomplish all this, you should understand some basic terms.
INCOME – We can break this down into 2 types: Sales is the money generated from the sale of goods or services. Other Income is any other money received into the business. If you wanted to break this down even further, you could have accounts to keep track of different types of income. Say you own a restaurant and want to know if you sell more in beer or wine. You just set up two accounts one Sales-beer and the other Sales-wine. This way every month you can take a look at the numbers and maybe adjust inventory if necessary.
EXPENSES – In a nutshell, how much are you paying out to keep the business running? These are your expenses. Again you can have 2 types. Cost of sale expenses or cost of goods sold are anything purchased or spent that directly relates to the stuff you sell. For example the take home containers you purchase to pack up customers leftovers are a cost of sales expense. You are making money from the sale of their meal minus the cost of the container they are taking home with them. The other types of expenses that don’t directly relate to sales are ones such as your rent, gas and electric, phone, postage and office supplies to name a few.
PROFIT & LOSS – Simply put the profit and loss is how much you make or lose in your business. And keep in mind profit does not necessarily equal the amount of money you have in the bank, your profit is a number on the Income Statement that is a combination of other factors then just cash. You can actually be in the red with your checking account and still be making a profit, this is called a cash flow problem or that old saying the check is in the mail.
INCOME STATEMENT – The Income Statement is one of the business reports you’ll find yourself looking at frequently. It’s a record of the day to day income and expenses of the business. This is where you’ll find if your business is making a profit or loss. It’s the bottom line on the report. We’ll talk more about this report and others in future posts.
ASSETS – Assets are the items that belong to the business. Currents assets are things that you can convert easily to cash such as Accounts Receivable (money clients and customers owe you) and of course the cash you have in the bank. Fixed assets are items that are necessary to generate the income and run the business. These types of assets are going to be kept for a long time. Examples: buildings & business vehicles.
LIABILITIES – Liabilities are what you owe to others. Current liabilities are items that will be paid out within a year. Accounts Payable (what you owe to vendors, suppliers, and others) is an example of this. Long term liabilities are loans that will be paid over a long period of time, like the mortgage on the building or property.
OWNERS EQUITY – Owners Equity is the difference between the Assets and Liabilities. Of course there’s more to it than that, but we’ll leave it like that for now and discuss again at a later time.
BALANCE SHEET – The report where the Assets, Liabilities and Owners Equity are summarized.
So are you still awake? Your probably wondering, is it really necessary for me to understand all of this? Well yes it is. Even if you’re going to contract with someone else to do your bookkeeping for you, you have to at least have a basic understanding of how it all works. You want to be able to know where your business stands financially at all times and you don’t want to just take the bookkeepers word for it. Of course you’ll only be working with someone you trust, but still you need to have a handle on things yourself too. That way when your talking to your accountants you’ll actually understand what they’re saying (well to some degree).
