All small businesses need small business accounting systems.
In my many years working with small businesses, I’ve seen a variety of systems being used - from a shoebox to a checkbook to multiple spreadsheets to a computer program. There’s plenty of options. But it all comes down to what you’re comfortable with. Your choice of small business accounting systems should be easy to use, but also useful.
An accounting system should provide you the info you need to make informed business decisions. Like these:
These decisions and more can be nerve racking, but if you have an accounting system in place, you will feel more confident making them.
If you’ve just started a business, or are trying to help someone who does, and you want to learn accounting for small businesses…
I’m going to suggest 2 options…
1. A manual system consisting of a cash receipts journal, a cash disbursements journal, and a general journal. These can be on paper or in a Microsoft Excel spreadsheet. They are easy to make, easy to use, and will give you lots of info to make better business decisions.
2. A computerized system using a small business accounting software package, like QuickBooks or Xero. They are relatively easy to use, and I’ll show you the basics. If you invoice customers, this is a good system for you.
Manual or computerized, a good small business accounting system requires:
Accounting files can be a file cabinet, or a couple of cardboard banker boxes, or if you’re a techy type, scanned files in your computer (do those backups!).
Once you set up your files, there’s always the questions, “What do I need to keep?” and “How long do I need to keep this stuff?”. Here’s the guidelines:
Files to keep 3 to 7 years:
Files to keep as long as you’re in business:
So, you’ve decided on a manual or computer small business accounting system, got a business bank account, set up a filing system, have a business credit card for small purchases, and you’ve got your business plan. Now, you need customers and then you’re in business! Then what? Right? Small business accounting systems should give you a place to record:
All of these business transactions can be recorded in either a manual or a computer system.
I’m going to illustrate using a manual system. If you use a computer system, the software does a lot for you, but I want you to understand the process anyway. So let’s discuss the use of journals.
In accounting textbooks, they talk about the Accounting Cycle. The cycle is this – business transactions are recorded into Journals. Journals are summarized into Ledgers. Ledgers are used to prepare Financial Statements. And then you start all over again. This should be a monthly process. But for some very small businesses, it may be a quarterly or even yearly process.
What are journals?
Journals are what we call 'books of original entry'. In the olden days, journals were actual books with 4-column pages. Something like this:
Bookkeepers would record each transaction, be it an expense paid, or a sale made. There were separate journals for different types of transactions. You had a Sales Journal, a Purchases Journal, a Payroll Journal, etc.
Now a journal is kept inside computer software. The software records each check you write into the Cash Disbursements Journal, for instance.
In the manual small business accounting system that I’ll show you, you will keep a Cash Receipts Journal and a Cash Disbursements Journal, and a General Journal (for non-cash transactions). Easy peasy. The paper you’ll use will look like this:
If you choose to keep your journals in Microsoft Excel instead of on paper, you’ll make a spreadsheet just like the paper above.
Now let's take a look at the General Ledger.
What’s a Ledger?
A ledger was another book, but this book had a page or two for each account (like Cash, or Accounts Receivable, or Rent Expense, etc.). See the illustration above. At the end of each month, all the entries into journals were summarized, and the totals were then ‘posted’ (recorded) onto the specific page for that account in the ledger. Then all the entries for that month were totaled inside the ledger for each account.
The following illustration shows what a slice out of a General Ledger. This page is for Sales.
As you can see, the sales journal total for the month of January is entered onto the ledger page, and the amount of $26,114 would be added to the balance from the previous month and a new total is calculated.
In my manual system, I skip using a ledger. You can keep one if you want to, but it’s not necessary.
The monthly totals from the ledger – called the ‘General Ledger’ – were used to prepare financial statements. Revenue and expense account balances were used to prepare an Income Statement (also called Profit and Loss Statement). Asset, liability, and equity accounts were used to prepare a Balance Sheet.
In my manual system, you can prepare financial systems right from your journals.
And that’s how you use small business accounting systems.
For more specifics on using a manual system, click here.
For more specifics on using a computerized accounting system, click here.