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Accounting

Accounting

An appropriate record-keeping system is vital to the survival of a new business. For those already in business, good record-keeping systems improve stability and opportunities for profits. Complete records will keep you in touch with your business's operations and obligations, and help you see problems before they occur. Accounting records provide information about volume of business such as changes over time, cash versus credit sales, and the level and status of accounts receivable. Good accounting records also help accomplish the following tasks:

Monitor Inventory

While a large inventory permits swift delivery when goods are ordered, too large means excess investment. If your inventory does not turn over quickly, your business may lose profits due to obsolescence or deterioration. Any items removed from inventory for personal use should be set aside in a special account for two reasons: they must be listed separately for tax purposes, and including these items in gross profit calculations can be misleading.

Control Expenses

Accounting records detail the amounts owed to suppliers and other creditors so that you can plan the availability of cash to meet your obligations. They also provide information regarding expenditures and allow you to establish controls over them more easily. You must always be aware of your individual expense requirements and how they relate to the overall business.

Fulfill Payroll Requirements

Payroll is one of the largest expenses in a small business. Adequate payroll records should meet the requirements of the following agencies and statutes:

• Internal Revenue Service
• State department of revenue
• Local department of revenue
• Workers' compensation laws
• Wage and hour laws
• Social security requirements
• Unemployment insurance requirements

You must provide annual reports and summaries for each of these. In addition, you must provide employees with the W-2 forms needed to file federal and other income tax returns. In order to provide this detailed information, you must maintain good accounting records.

Determine Profit Margin

Good accounting records will clearly show your overall level of profit, and provide specific information on the profitability of individual departments or lines of products within your business. Such analysis permits you to drop product lines that are unprofitable. In most cases, you can avoid losses if you maintain current records and analyze the information therein.

Improve Cash Flow

Good accounting records provide detailed reports of cash availability (both on hand and in the bank), shortages, and diversion of cash. Since cash is your most liquid asset, you must account for it carefully.

Use Supplier Discounts

A cash budget provides a projection of cash availability that may be used to pay invoices as they come due. Discounts from suppliers for prompt payment can provide substantial savings. A 2 percent discount is common if the bill is paid in full within 10 days; if not, full payment is due within 30 days.

Measure Performance

Good business records help you measure business performance by comparing actual results with your budget and those of other similar businesses.

Requirements of a Good Accounting System

The following criteria are essential to a good record-keeping system:

• Simplicity
• Accuracy
• Timeliness
• Consistency
• Understandability
• Reliability and completeness

There are many accounting systems that can be purchased and adapted to your individual business, or you may prefer to use a system specifically designed for your business.

Commercial Record-Keeping Systems

Record-keeping systems are currently available in the marketplace at stationery stores, publishers, and business advisory services. These systems either are specifically designed for a certain type of business or are general enough to be used by many different types of businesses. Systems are available for cash basis recording, accrual basis recording, and for both single and double entry.

Computerized Record Keeping

Consider using a computer for your business operations. Compare different software systems and make sure that the one you choose provides accurate, timely information and adequate presentation of accounting information for small businesses.

Low-cost computer programs can handle many of the book entries necessary in hand-maintained systems. Appropriate hardware and a good general ledger software program can simplify recording business transactions and summarizing the information into appropriate accounting presentations.

Accounting software lets you enter individual transactions and post them directly to a general ledger. A printout at the end of a given time period shows the individual account activity, a balance, and total of the accounts, and also provides a trial balance presentation. If the software is designed properly, it will offer appropriately prepared financial statements (balance sheet, income statements).