BOOKKEEPING

Financial records document the operations of a business. Financial records are an extremely important tool for managing the inflows and outflows of a business activity. There are certain required records that must be maintained to satisfy the Internal Revenue Service for income tax reporting. However, the need for good record keeping goes beyond the IRS. Information, which is specific to your business, should be documented in an organized manner to enable you to efficiently and effectively manage your business. If adequate records are kept, peaks and dips in sales are easily determined; cash needs for payroll or outstanding bills are easily counted; and inventory can be controlled by maintaining records.

The simplicity or complexity of the record keeping system is dependent on your personal preference and the needs of the business. For example, an accounting system can be as simple as a 3-ring notebook with notebook paper or be as complex as an entire computerized system. The Small Business Development Center is equipped with a Lotus Learning Center, a free service that makes IBM computers and Lotus software available to small business owners. Here you can learn how to use computer hardware and various software with a self-paced demonstration package and training manual. Also, the IRS provides a free publication entitled, The Small Business Tax Kit, which illustrates the required record keeping for tax purposes. There are several inexpensive computer accounting packages available, which are relatively easy to customize and use.

No two sets of financial records are the same. However, the basic format includes a Cash Payments Journal (checkbook register), a Cash Receipts Journal (receipts book), a Sales Journal, an Accounts Receivable Journal, an Accounts Payable Journal, and a General Journal. The standard financial statements include a Balance Sheet, an Income Statement, a Statement of Owner's Equity, and a Statement of Cash Flows.

The accounting vocabulary can be overwhelming at times. A "journal" is nothing more than diary or a logbook. The purpose of the diary is to keep tract of similar type transaction items in a separate diary. For example, in the Sales Journal, you keep track of all your sales in the same diary, which is separate from your check register called the "Cash Disbursements" Journal.

LEDGER BOOKKEEPING

TYPE OF JOURNAL and HOW IT IS USED

CASH DISBURSEMENTS CHECKBOOK REGISTER

-JOURNAL RECORD MONEY SPENT

CASH RECEIPTS JOURNAL RECEIPT BOOK

-RECORD MONEY RECEIVED

SALES JOURNAL -RECORD INVOICES WHEN SALE IS FINAL

NOT DEPENDENT ON CASH RECEIVED

ACCOUNTS RECEIVABLE -DETAILED LISTING OF CUSTOMERS TO JOURNAL WHOM YOU SOLD MERCHANDISE ON CREDIT

ACCOUNTS PAYABLE -DETAILED LISTING OF VENDORS FROM JOURNAL WHOM YOU BOUGHT MERCHANDISE ON CREDIT

ENE -JOURNAL MASTER FILE, RECORDS ALL INDIVIDUAL ENTRIES AND TRANSACTIONS FROM EACH

Balance Sheet

The balance sheet shows the financial position of a company at a particular point in time. It is like taking a snapshot of the company's records on the last day of the year. Assets are basically things you own. They are items of value expected to produce future economic benefit. Liabilities are amounts you owe. They represent claims of outside creditors on your assets. Owner's Equity is the value of assets that you actually own - the net value of assets after paying off liabilities. The basic equation in double entry bookkeeping is the amount of the assets equals the sum of liabilities and owner's equity. The left column (assets) must equal the right column (liabilities & owner's equity).

BALANCE SHEET

AS OF 12/31/XX

ASSETS

LIABILITIES

CASH

ACCOUNTS PAYABLE

INVENTORY

LOANS PAYABLE

EQUIPMENT

OWNERS EQUITY

BUILDING

LAND

TOTAL ASSETS

TOTAL LIABILITIES AND OWNERS EQUITY

Income Statement

The income statement measures the profitability of a business for a period of time. This period can be a month or a year. It is similar to taking a video movie of the company over the year. Revenues represent inflows of assets from performing some activity, such as selling a product or performing a service. Revenue does not necessarily mean cash received. Expenses represent costs incurred to produce revenues. Net Income represents the excess of revenues over expenses for a given period. The net income figure is added to the owner's equity balance listed on the balance sheet.

INCOME STATEMENT

FOR YEAR ENDING 12/31/XX

REVENUES/ EXPENSES

SALES

OPERATING EXPENSES

INTEREST INCOME

ADMINISTRATIVE EXPENSES

SELLING EXPENSES

TOTAL INCOME

TOTAL EXPENSES

NET INCOME

Statement of Owner's Equity

The statement of owner's equity shows the changes in the owner's equity account over a period of time. It is similar to the income statement in that it is like taking a video movie of the company over a year. Net income increases owner's equity. Cash withdrawals by the owner decrease the balance. The ending balance of owner's equity is listed on the balance sheet.

Statement of Cash Flows

The statement of cash flows shows the movement of actual cash during the year. It is used to illustrate the inflows and outflows of cash in the company. This statement is very important to lending institutions. This statement will show if the company has the cash available and can reliably pay back borrowed money.

STATEMENT OF OWNER'S EQUITY

FOR YEAR ENDING 12/31/XX

STATEMENT OF CASH FLOWS

FOR YEAR ENDING 12/31/XX

BEGINNING BALANCE

NET INCOME

WITHDRAWALS

ENDING BALANCE

CASH AT BEGINNING OF YEAR OPERATING CASH FLOW INVESTING CASH FLOW FINANCING CASH FLOW

NET CASH FLOWS

© 2007 Personal Urban Financial Services, Inc