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Basic Bookkeeping |
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Basic Bookkeeping |
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Basic Bookkeeping for Small Business
The purpose of this document is to specify and describe those financial records that must be maintained by every business enterprise. These records must be kept to conform to either Company or income tax legislation or both.
Many business people believe that legislative requirements are the only reason why records should be kept. However, your records provide information vital to you in the day to day operation of the business and vital for the preparation of your end of year financial statements and income tax returns.
In addition to these financial statements, regular periodic reports should be prepared and used intelligently to alert you to how your business is progressing. Your records should include information on profitability, cash flow, and statements comparing actual expenditure with predetermined budgets.
The following represents the basic bookkeeping records that should be maintained by business proprietors:● bank statements
● sales invoices
● sales journal
● receipt books
● cheque butts
● bank pay-in books
● cash book
● petty cash book
● orders
● creditor's invoices.
These types of records are considered in detail below.
Bank statements
Every business proprietor should open a trading account at his local bank. All cash received should be banked intact preferably on a daily basis. All payments should be made by cheque. If this discipline is followed, any bookkeeping system will be relatively easy to maintain.
Arrangements should be made to have bank statements collected from the bank weekly. Where there is a high volume of cash, cheque, and credit card transactions it may be preferable to collect bank statements daily. Only
by a frequent and regular review of the bank statement can a business proprietor safely monitor the cash status of his business.
Sales invoices
These will normally be printed and will display such items as business name, address and telephone number.
Also the name of the proprietor, the firm logo -if there is one, the State of incorporation if the business is
structured as a Company and the invoice number. It is also useful, from a marketing point of view, to include a description of the goods or services being offered eg. "Leaders in the Field of Sporting Equipment".
An invoice is made out whenever a sale occurs. Information on the invoice should include.
● date of sale;
● order number or other reference from customer;
● name and address of customer;
● full details of goods or services sold;
● amount charged to customer. If relevant, the amount of tax should be shown as a separate item and included in the final invoice total;
● whether the sale is one of cash or credit. A credit card transaction is best treated as cash.
Invoices should all be pre-numbered. To maintain internal control over sales, all invoices should be accounted for and recorded.
Sales journal
This book is sometimes referred to as a day book and is used to record every invoice, whether the invoice is one for cash or for credit. It thus represents a record of all sales and should be totalled daily, weekly and monthly.
An up to date knowledge of the level of sales is important to any proprietor in a business particularly insofar as monitoring the break-even position is concerned and comparing the actual performance with pre-determined budgets. The sales journal can also be used to "post" debit entries to the debtors ledger. This record forms the basis of debtors control or book debts outstanding.
Receipt books
The simplest forms of receipt books are the pre-carbonised duplicate variety. The top copy is provided to the customer while the duplicate copy, which remains in the receipt book, is used as a basic source document for listing in the cash book.
There is an advantage in issuing a receipt, or at least making out a receipt, for each and every sale. The more , important reasons are set out below:
● In respect of credit sales, control can be exercised over the firm's debtors. The receipt book can be used to list all receipts for credit sales into the cash book (see below). The cash book in turn is used as a posting medium to the debtors ledger. From a recording point of view it is the sales invoice that raises the charge against the debtor; and the duplicate receipt causes the unpaid balance to be reduced or extinguished.
● A receipt should also be made out from the receipt book every time a cash sale is made. The receipt should clearly indicate that the sale is a cash sale. It is sound business practice to bank all sales proceeds on a daily basis. If this is done the total of all cash receipts should reconcile with the total of cash deposited into the bank as cash sales. If there is any variation between cash receipts and cash deposited, further records should be kept identifying the nature of the variation. For example it is sometimes necessary to use cash from the till to pay small items of expense.
This type of expense should be kept to a minimum. Where it cannot be avoided, a strict record should be kept of the nature of the expense. Apart from being sound business practice such records are required to comply with expense substantiation requirements under income tax legislation. (Refer also notes relating to petty cash transactions. )
Where a cash register is used the cash receipt takes the form of a tape built into the register. The total of the tape (often referred to as the Z setting) should agree with the amount of cash banked each day. Again any variation should be explained and kept on record. The cash register tape is a very useful record in that apart from recording sales values, it can also provide an analysis of types of sale, numbers of customers, the time of day when sales are made and other useful information for prospecting and marketing purposes.
A cash register tape does not, however, provide the all-important customer name and address. This is why you should make out an invoice for all sales, including cash sales. The name and address of your customer
represents valuable information for your future marketing plans.
Cheque butts
As referred to above, all payments should be made by cheque. No records then need to be committed to memory and meaningful analysis can be undertaken for the purposes of managing the business. Each cheque butt should record the date, the name of the creditor, the nature of the expenditure and the amount.
Bank pay-in books
Also known as bank deposit books. In the same way that all payments should be made by cheque, all takings should be banked in full. The pay-in book should record the date of banking, a list of cheques received, and cash dissected by notes, and credit card slips. The total banked should agree with the total of receipts made out.
Cash book
This is probably the most important basic bookkeeping record as it summarises every item of cash that is deposited into or is paid from your business bank account. For convenience, it may take the form of a pre-ruled
17 -column book obtainable from most stationers.
It is important to keep the cash book continuously up to date. All columns should be totalled and cross balanced even if the totals are only jotted down in pencil. Periodically the balance shown on the cash book is reconciled with the balance shown on the statements received from the bank. This procedure ensures that discrepancies have not occurred.
Payments made in cash
● keep to a minimum;
● do not make payments from cash sales;
● use a petty cash "imprest" system and maintain a petty cash book and a petty cash tin.
Filing
● file dockets relating to expenditure in cheque number order;
● maintain remittance advices and other documents relating to non-trading income in a special file;
● new assets (motor vehicles, plant, furniture, etc.);
● keep copies of invoices aside in readiness to give to your accountant;
● keep hire purchase agreements and lease agreements in readiness to give to your accountant.
Petty cash book
Previously it was suggested that all payments be made by cheque. In practice this is not always possible and certain sundry payments may have to be made by cash (eg. donations, tips for garbage disposal, staff provisions etc.) Rather than "dipping into the till" to pay for these items it is preferable to draw a cheque for an "imprest" amount of petty cash -say $100 -and each time this cash float is used, record the date, name of payee, amount spent and nature of expense in a petty cash book provided for this purpose. In these days of having to "substantiate" items of expenditure it is essential to maintain complete records, including vouchers, to support taxation claims for expenses at the end of the financial year.
From time to time a cheque will need to be drawn for petty cash to reimburse the petty cash tin up to the amount of the float. For example if $82.50 has been spent there will only be $17.50 remaining in the tin. A cheque for $82.50 should therefore be drawn, cashed and that sum placed in the petty cash tin for future use.
Orders
Each time you order goods or services it is sound practice to write out an order. By using a pre-numbered order form, quoting the number to the supplier, and mailing the top copy of the order to them, disputes concerning supplies, quantities and prices are reduced. The supplier will soon understand that the business-like approach
you take with your ordering procedures will not allow them to argue later about details. Information on the order should be as comprehensive as possible.
Creditors' invoices
As soon as these are received, they should be checked with your order form. The invoice should then be checked against the goods received. Only in this way can there be an effective stock control system. Any shortages or errors of fact should be notified to the supplier promptly.
Once checked, the invoices can be filed in an A -Z file or cabinet. Provided you comply with the supplier's trading terms, an ideal system is to pay all suppliers once a month. An effective way of paying creditors is to allot, for example, one day a month to the settling of all debts. Care should be taken to ensure that all invoices are taken into account when administering this task. Overlooking unpaid invoices can prove very costly to a firm's cash flow.
Stock Around the 30th of June each year, carry out a physical stocktake of all trading stock. List every item of stock on pre-ruled stock sheets. File these stock sheets for possible investigation by the Tax Office. Value stock at cost unless the market value of the item has fallen below cost. If this is the case, value the item at market value and mark 'market value' on the stock sheet
A manual or computer system?
The previous paragraphs presuppose that a manual system of bookkeeping records will be maintained. However in today's commercial world the computer is assuming a dominant role. Computer literacy is a desirable objective for all business people. As a business progresses the need for computerisation becomes obvious and in order to compete with your business peers, computer systems will probably need to be introduced.
Most successful computer systems are developed from successful manual systems. While it is difficult to generalise, it can be said that the implementation of a sound manually operated bookkeeping system will provide a strong basis of management control for any new business. Once implemented, various computer systems can be researched over a period time, to determine efficiency and cost saving benefits. In that way the accounting system in place will become fully understood and its value appreciated. This is something that may not happen if a very costly and hastily introduced computer is first installed.
In considering the type of manual system to use, it may be worthwhile looking at some of the "one-write" systems available in the market place. For example a cash receipt may be made out for a customer. Beneath the receipt is the customer's ledger card and beneath the ledger card is the cash book. Thus three necessary operations can
be completed in one fell swoop. Even a computer may struggle to improve on this.
Conclusion
A simple bookkeeping system can be operated in a number of ways. The books and records referred to in this information sheet are listed by way of guide only. Under normal circumstances they can be maintained by the business proprietors themselves.
However if those proprietors find the task too difficult they should adopt any of the following procedures:
● attend a course about records and cash flow;
● engage the services of a bookkeeper;
● engage the services of an accountant.