Small Business Bookkeeping & Accounting

Small Business
Bookkeeping & Accounting

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Organization and Preparation

The basic building block to good books is data entered in the right place. Bookkeeping is merely recording expenses and income. Whoever is entering the data needs to understand the true nature of each and every expense, and be able to put it in its right place. To begin with, you need a system to identify each purchase, and note its account number, or at least identify the category. This can be done by you, going through bills and marking each one with the right account name or number. The electric bill is easy - utilities, 5820. The hardware store might need a bit more thought if you want to separate small tools from supplies - the drill you bought is 4809, the lumber you bought for packaging is 4550. The best trick is to identify the expense category when you make your purchases. How? When you sign the slip at the hardware store, you write right on it - drill: small tools. Lumber: supplies. That way, your bookkeeper can look up the number - you've passed on the wisdom of what category it goes to and you avoid the problem of..."now, what did I buy that for?"

So, begin by figuring out who will identify which account number gets assigned to each item. Get your routine established, and stick to it. This is a critical step. If you don't pay attention, and set up a workable system, you will end up with meaningless information.

The second step in getting your system organized is learning a little about the rules to follow when you are dealing with bookkeeping. A bit of time spent with your accountant is the first step toward saving yourself time and money. Large tools have to be depreciated. New terms here... so bear with me as we go through this section. All that means is that the total cost of the tool cannot be listed as an expense which you deduct from your taxes this year. The thought process is this: Say you purchase a $5,000 saw that will last you 5 years. Therefore, you may deduct $1,000 each year for each of five years. You need to work with your accountant to set up your depreciation schedules: one for your books, and one that recognizes the tax laws. But that's a one time simple project. Give your account information of what the item is (including the serial number), when you bought it, and for how much. Your accountant will return to you a depreciation schedule which that be updated each year with your taxes.

You should always have a list of tools, the value (purchase price) of which exactly equals the item on your balance sheet labeled "equipment" likewise for office equipment and vehicles. Anything included in fixed assets should have a supporting list of what the items are. You will note an item on the asset page of your balance sheet that's called "accumulated depreciation" - that shows the amount by which the assets you are listing have been depreciated. If you take the asset value and subtract the accumulated depreciation, you will see what the book value of your tools is. Eventually, they will be completely expensed and have no value at all. But the theory is by that time, you will have junked them and bought more. So, especially in any business that buy durable equipment, it may well be true that you have more value in tools than your books show, which is a point you can make in person with your banker. You can't change it in your books.