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Business Bookkeeping Systems and Methods

The type of business you are in will affect the type of records you keep in a number of ways. Whatever system of bookkeeping you use, the details will have to be adapted to your special needs. It is important to have all the information you need for your own use in managing the business and for tax purposes. At the same time, your records should not be cluttered with details that aren't really necessary.

There are many variations when it comes to keeping records. For example, If a housewife buys a dozen oranges for $0.79, a grocer using the simplest method of recordkeeping merely records the fact that a $0.79 sale has been made. He doesn't care whether the sale involves a dozen oranges or a pound of meat.

Another grocer might want to know that $0.79 worth of fresh produce had been sold, as opposed to meats or dry groceries. Under normal circumstances, however, he wouldn't need to know whether the $0.79 entry on his financial records represented a dozen oranges or some other item of fresh produce. But if an appliance dealer, for instance, sells a television set for $419.95, he will want to record a number of facts in addition to the amount of the sale: the brand; the model number; trade-in information, if applicable; sales tax, if any; service contract charge if service is included; and so on.

Thus, a grocer would not use the same bookkeeping system as an appliance dealer. In fact, in department or general-merchandise stores where both groceries and television sets are sold, different systems are generally used for recording sales in the two departments.

Cash & Accrual Accounting: Bookkeeping systems differ in the basic method of recording as well as in the amount of detail shown. For income-tax purposes, the Internal Revenue Service recognizes two basic methods - the cash basis and the accrual basis.

When books are kept on the cash basis, no income or expense is entered in the journal or ledger until cash is actually received or paid out. When the accrual basis is used, income from a sale or other income-producing transaction is entered as soon as the transaction takes place, even though the cash may not be collected until some future date. Likewise, in accrual accounting, expenses are recorded when they are incurred, even though payment may not be made until later.

Suppose, for example, that you sell $100 worth of goods on credit. If your books are kept on the accrual basis, the sale will be entered in the journal immediately. Later, when the account is paid, you will make another entry to record the payment. If your books are kept on the cash basis, you will keep a memorandum record of each credit customer's account. A credit sale will be noted on this account but not entered in the journal until the bill is paid.

Now suppose you pay your employees every Friday, and December 31 falls on a Monday. If you use the accrual method, you will enter the amount of the wages earned between the end of the last pay period and the close of business on December 31 as a December expense, even though you pay it in January. If you keep your books on the cash basis, you will make no entry until you pay the employees on January 4.

Which Method Is Best for You? The Internal Revenue Service allows you to use either basis of accounting - cash or accrual - provided that it clearly reflects income, and that you use it consistently. Internal Revenue regulations state, however, that where inventories play an important part in accounting for income, the accrual method must be used in recording sales and purchases.

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SolveYourProblem.com : 2007

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