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Bookkeeping is an art and science. It has a set number of established rules and yet the system can be freely modified by users as per need. Bookkeeping and accountancy are often confused to be one single discipline. However, these are two different disciplines. Bookkeeping principally involves keeping a proper record of all the transactions that take place, whereas, accountancy involves processing and analyzing the recorded transactions. The point where the two overlap is, the preparation of balance sheet, cash flow statements and other analytical, costing related statements. The preparation of these statements is basically said to be a combination of the two, as it involves both recording and interpretation of transactions. Conventionally, bookkeeping has been considered to be a part of accountancy.
When it comes to small businesses, owners in several cases, are impartial to the importance of bookkeeping and accountancy. However, the use of these two disciplines even in small businesses proves to be productive and effective, in not just keeping a track of money, but also in analysis. Here are some simple tips, tricks and guidelines which will help you to maintain very good books of accounts.
Bookkeeping Tips and Tricks
Before we start off with the tips, here’s one suggestion, make it a point to follow the double-entry system. The significant advantage of such a system is that, two entries offset and verify each other and any possibility of mistake or fraud is ruled out. Essentially, this system, which was developed by Luca Pacioli is considered to be the perfect system to maintain the books of accounts, due to the two self-verifying entries. Apart from that, it is also not that difficult to execute.
1. Proper Books, Every Day
This is the first and the most important step in the bookkeeping process. Punctually maintaining proper books of accounts is in fact the first step of bookkeeping. It is wise to pass journal entries as soon as the transaction takes place. Now, you can select two types of ‘basis’ for the entries, they can be either cash entries, that is the entry is recorded in the books of accounts as the transaction takes place. In accrual basis, the entry is made before the transaction. When you maintain books of accounts, you can pass entries in the journal and then transfer all the entries to the ledger book, before the closing of the day. To simplify matters, you can maintain 5 more books:
- Cash Book (for cash transactions)
- Creditor-Debtor Book (recording all transactions done on credit or debt basis)
- Purchase Book (entries for purchase)
- Sales Book (entries for sale)
- Bank Book (transactions affecting bank accounts)
These books can be updated regularly, by first filling the journal and then passing the entries in the ledgers and the aforementioned books. Regularity in bookkeeping leads to enlightening accounting and further more, profit.
2. Periodic Balance Sheet
It is wise to prepare a balance sheet at short and regular intervals. One side will contain all liabilities including the current liabilities such as creditors. The second side shall contain all assets as of date and their market value. While preparing such between-the-year balance sheets, make it a point to include all accrual and market values. Such a balance sheet can be prepared at every weekend, after a quarter or after a 6-month period. Fact is, preparation of such a balance sheet always helps you to keep a better track of your financial status and that of the business.
3. Proper Record Keeping
Apart from maintaining the books of accounts regularly, make it a point to accompany them with appropriate records. For example, your purchase and sales books should contain all invoices and the creditor-debtor books should contain all bills of exchange, promissory notes, etc. Keeping such records will help you to keep a tab on the accounts and it is also a very good verification system.
4. Include Costing in the System
Now this one’s a pretty difficult one. You can include a cost sheet, which can be made at regular intervals, such as a week, month or even a quarter. The cost sheet, depending upon your business should include the following:
- A total of all possible incomes and sales, per unit (divide the total income by the number of units sold/produced/in-stock) and the number of unsold units and the ones which are still in process (approximate monetary amounts).
- The purchases, costs incurred, expenditure of machine hour rate, relevant depreciation and all possible expenditures, per unit or per hour (divide the total expenditure by number of units sold/produced/in-stock).
- The third element on the costing statement is the first point minus the second point. In such circumstances, the derived figure should be positive, as it indicates profit.
5. Make Provisions of Expenses
It is advisable to make certain provisions for expenditures such as asset procurement, taxation, loans and payment to creditors. Basically, open a free of charge bank account or take up any fixed return investment in order to make appropriate provision for anticipated or planned expenditures.
6. Regular and Strict Audit
In order to ensure transparency in the financial aspects of the business, make it a point to audit the books of accounts as strictly and as frequently as possible. This will rule out the possibility of mistakes and also the possibility of frauds or late payments.
7. Reminder System
In case if you are using software and programs to keep your books of accounts, make it a point to install a reminder system in order to get alerts regarding accounts payable or receivable, along with the details of the account. This will help you to make pay-offs exactly on time.
Apart from these tips, you may also resort to modifying your own accounting system. Always bear in mind that bookkeeping is all about keeping track of money, keeping track of money spent or earned and also keeping track of the money that is yet to be spent or earned. Discipline, diligence and regularity are the 3 most important qualities, which will help you to maintain fantastic books of accounts and perfectly know the financial status of the company. Apart from that, also take into note that when you know the finances of your business well, you can run your business very, very successfully.