Taking the mystery out of basic accounting

MAT-SU -- Basic bookkeeping covers the organization of a business' financial records. There are many choices for how to keep one's books, says Jean Sheffield, EA, of Carney and Associates LLC. Most important, she says, is to keep track of what is relevant to you, and what is needed in order to pay the Internal Revenue Service.

The first choice is how to enter your transactions into an accounting system. There are two entry types to chose from: Single entry and double entry. Single entry bookkeeping only records income and expense as they happen. Double entry accounting is a system in which each transaction is recorded twice, under the methodology that every transaction has two sides and must be recorded in two accounts. An example of this would be if you pay a bill to the electric company, you would first record a deduction in your checking account, where the money came from, and then record an addition to your utilities account, where the money went. This allows you to see where your money is going, how it is being spent, and how much you spend/earn each year in the different categories that you set up.

"Double entry is the type of accounting most [businesses] need to do, but most don't because it scares them, and it shouldn't," Sheffield said.

There are also different methods of accounting in terms of when you record money earned or spent. Cash basis is usually done with a single entry format, and is recorded at the date of payment. The accrual accounting method is recorded at the date of the transaction, and is usually done in a double entry format.

"Cash basis only records the income that has been received, there is no forecasting," Sheffield said. "Accrual records income at the time your create the invoice, before payment is received."

Accrual reflects all income and expense paid or due, whether or not you have paid a bill or received a payment is irrelevant.

The next question is, which method to choose? Do you go single entry or double entry, cash or accrual? While each business must make that decision based on the dynamics of that business, there are some general ideas of which one works best for each type of business. If you are working a small business from the side, pay the bills and receive payments into your personal checking account, and do not acquire enough tax itemized deductions to make it worthwhile, you probably want to go with a single entry, cash basis method of accounting. The Dome Simplified Monthly Bookkeeping Record book is great for this type of accounting, Sheffield says, and is available at any office supply store.

If you are running your business with its own bank accounts, are making enough money to make itemized deductions worth your while and/or have a business where it takes your clients a long time to pay you, double entry accrual basis is probably your best bet. The Economik Check Register is probably the best handwritten accounting record book for this type of accounting, Sheffield says, but reminds all business owners that computer accounting programs like Quicken can be used to save time.

Accounting firms usually will have consulting services to help determine the best accounting method for your business.

Turning records into useful documents

It's useful knowing what kind of shape your business is in, says accountant Jean Sheffield of Carney and Associates LLC. While a seemingly obvious statement, some businesses do not take the time to do the proper paperwork needed in order to evaluate their businesses' successes and shortcomings.

"It is very difficult for a person to separate themselves from their business," said Sheffield, at a recent seminar at the Mat-Su Small Business Development Center. Learning how to compute a few documents based on your accounting during a week, a month a year, or even a day, can save a business from making simple, yet drastic, mistakes that can lead to money loss.

"There is no way to run your business without knowing how much money you have," Sheffield said. She listed some of the following documents for keeping abreast of your money situation.

Profit and loss statement: This document simply tells whether or not your business is making or losing money. It is a cumulative report up to the date computed, and, in layman's terms, deducts your total expenses from your total income to come up with a net income. Ideally, you would want that net income to be a positive number, although there are circumstances, such as just starting a business, which could make that number negative without running a business into the ground.

Balance sheet: This document assesses your business' net worth on the date that it is computed. Usually the balance sheet and profit and loss statement are done on the same date, to give the business owner and any possible investors an idea of how the business is doing. The balance sheet shows the total current assets, such as a bank account and payments due to your business, the total fixed assets, such as furniture, the total current liabilities, liabilities you will pay off within one year, total long-term liabilities, such as a bank loan, and total equity, which is your investment in your business.

Statement of net worth: This document is similar to the balance sheet, expect it is created to show your own personal net worth, instead of your businesses.

For more information on how to create these documents, the Mat-Su SBDC offers one-on-one counseling and training sessions. Contact them at 373-7232 for more information.