Lester Bahr CPA, LLC
Allentown, Pennsylvania
Enlightened solutions within your grasp
Bookkeeping basics
Often times entrepreneurs are not very attentive or interested in keeping the books. They may have a special talent that makes them a great inventor, technician or salesperson, but they view paperwork and bookkeeping as drudgery. However, to remain in business there are certain basic bookkeeping standards that must be followed. These standards are necessary not only for determining taxable income, but also to monitor the financial and operating health of the business.
For any business, well organized bookkeeping records are a necessity in order to prepare the financial statements which represent the score sheet of the business success. Financial statements are also vital in providing owners with clues that may show where the business is faltering in time to head off a potential financial disaster. Financial statements that document the results of your operations will also be required by many outside decision makers such as banks, creditors, and investors.
The importance of well-organized accounting records should never be underestimated. In fact, one of the leading mistakes made by small businesses owners is improper or misguided business decisions based on inadequate information from poor financial records. A bookkeeping system does not necessarily need to be complicated in order to be effective. It is better to have a well-organized basic system than to have one that overwhelms you with complexity to the point where it is not used effectively. The wrong system can be almost as bad as no system. Rather, you need to strike a balance between one that is sophisticated enough to provide the information you need to run your business yet simple enough for you to operate. Your bookkeeping system must also be able to provide the information required of governmental taxing and regulatory agencies in the specified format. Your CPA can be an invaluable resource in helping you design the proper bookkeeping system for your business.
Developing a chart of accounts for your business
Your chart of accounts provides the basic financial reporting foundation for your business. As such, it needs to be designed with a great deal of consideration for your present needs as well as for future growth of your business. This means the numbering and organizational structure of your chart of accounts needs to be dynamic in order to evolve with the changes in your business over time.
The complexity of your chart of accounts will vary depending on the type of business you operate. Among the considerations will be:
- Whether your business uses cash, accrual, percentage of completion or some of basis of accounting
- The extent of your inventory and whether you use a perpetual or physical inventory system.
- The extent of capital assets used in your business.
- Whether you need to track accounts receivable and accounts payable
- Whether you will be selling different types of products or services and need to report revenues and expenses by profit centers.
- Whether your business will operate in multiple locations.
- Will your business have payroll.
Each of these considerations (and many others) will influence how your chart of accounts should be developed. Again, a CPA can help you to design the ideal chart of accounts and related subsidiary records best suited for your business.
Accounting methods: cash vs. accrual
By the time you are ready to enter your first business transactions you will need to make a decision whether to use the cash or accrual method of accounting. The advantage of cash basis accounting is its simplicity for small businesses. Under this method, you record sales when you receive payment and record expenses when you write the checks. However, simplicity is not always better. Cash basis accounting also has significant disadvantages as well. Among them is the fact that net profit recognition can be extremely erratic due to the payment patterns of your customers and the timing of when you pay your expenses. Consequently, financial statements prepared using the cash basis of accounting can be distorted and misleading.
Most users of financial information, including investors and bankers, would probably prefer to see results reported using the accrual basis of accounting. Under this method, revenue is recognize when earned, not when collected, and expenses are recognize when incurred, not when paid. This allows for matching of revenues against related expenses and provides a more accurate representation of operational results. It should be noted that if inventory is a material asset, your business may be required to use the accrual basis of accounting.
Who should process the accounting records?
Basically, there are two broad choices here. You may wish to process your accounting internally by hiring a bookkeeper or doing it yourself - assuming you have sufficient experience in this area. Your CPA can then focus of providing the higher accounting, tax and consulting related services. Doing the accounting in-house, however, does require a significant commitment to detail, skill and time involvement.
A second option might be to outsource the complete bookkeeping function. Many small businesses find this to be the option of choice simply because they can get accurate financial record-keeping at an affordable cost without having to hire an internal bookkeeper and incur the related salary, benefits and training costs.
Using accounting software
With affordably priced small business accounting software such as a QuickBooks, most small businesses will choose to go this route. As I've explained in other articles though, the most important aspect of computerizing your accounting function is selecting the right software package for your business followed by the proper setup and implementation of that package. But, no accounting software regardless of how expensive or sophisticated it is will solve the problem of poor accounting procedures, or the inexperience of the person using it .
