Perhaps the hardest part of accounting is getting over the psychological hang-up that most people seem to have about it. Many of us are loath to balance our checkbooks on any regular basis, much less keep detailed accounts of how our money comes and goes. The good news is that you don't need to be a financial wizard to run a small business; you just need a comfortable working knowledge of the basics.
Fortunately for today's entrepreneurs, inexpensive, powerful and easy-to-use software, such as Quickbooks or Quicken, is available to help simplify the accounting process. Once your income and expenses are entered into the system, you're only a few mouse clicks away from sophisticated financial reports that would have taken many hours and considerable skill to generate just a decade ago. In fact, these programs are so affordable (around $100) and user-friendly it makes little sense not to use one of them.
Accounting has two basic goals:
- to keep track of your income and expenses, improving your chances of making a profit, and
- to collect the necessary financial information about your business to file your tax returns and local tax registration papers.
Sounds pretty simple, doesn't it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records.
The actual process of accounting is easy to understand when broken down into three steps.
- Keep receipts or other acceptable records of every payment to and every expenditure from your business.
- Summarize your income and expenditure records on some periodic basis - generally daily, weekly or monthly.
- Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific time.
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.
Keeping Your Receipts
Comprehensive summaries of your business's income and expenses are the heart of the accounting process. But they can't legally be created in a vacuum. Each of your business's sales and purchases must be backed by some type of a record containing the amount, the date and other relevant information about that sale. This is true whether your accounting is done by computer or on hand-posted ledgers.