The nuts and bolts of bookkeeping
Every bookkeeping system has a few consistent elements. Here is a list of what your business requires to ensure that it’s bookkeeping by the book:
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Chart of Accounts: Lists all accounts in the books and is the road map of a business’s financial transactions
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Journals: Place in the books where transactions are first entered
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General Ledger: The book that summarizes all a business’s account transactions
Accounting for debits and credits in double-entry bookkeeping
In double-entry bookkeeping, you enter all transactions in the books twice: once as a debit and once as a credit. This chart shows you how debits and credits affect your various business bookkeeping accounts.
| Account Type | Debits | Credits |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Drawings | Increase | Decrease |
| Revenue | Decrease | Increase |
| Expenses | Increase | Decrease |
Current ratio: a valuable tool for bookkeepers
Bookkeepers use the current ratio to compare the current assets of a business to its current liabilities. This ratio provides a quick glimpse of your business’s ability to pay its bills. The formula for calculating the current ratio is
Current assets ÷ Current liabilities = Current ratio
The following is an example of a current ratio calculation:
$5,200 ÷ $2,200 = 2.36 (current ratio)
Lenders usually look for current ratios of 1.2 to 2, so any bank would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because that indicates that the business doesn’t have enough current assets to pay its current bills.
Best bookkeeping practices to help you manage your business
Regardless of the size of your business, efficient bookkeeping practices are essential to keep any business running smoothly. Here are some helpful hints to help you streamline your bookkeeping process:
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Set up a chart of accounts that best keeps track of all your bookkeeping information.
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Balance and record daily sales and cash receipts daily.
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Reconcile your bank account.
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Watch closely your accounts receivable from customers.
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Pay your bills accurately and on time.
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Set up sales and revenue targets and monitor your progress closely.
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Budget for all your expenses and compare your performance to budget regularly.
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Watch for unusual changes in sales or expenses.
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Monitor your gross profit closely and make any necessary pricing or purchases decisions.
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Take care of slow moving inventory.
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Pay your employee withholding taxes and GST/HST when due.
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Take physical counts of your inventory and compare to your bookkeeping records.
How to control your business cash
Bookkeeping is all about keeping tabs on where your business’s cash is. Here are a few handy tips that will ensure that your bookkeeping doesn’t require too much red ink so your small business can thrive:
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Separate cash handlers. Be sure that the person who accepts cash isn’t also recording the transaction.
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Separate authorization responsibilities. Be sure that the person who authorizes a payment isn’t also signing the cheque or paying out cash.
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Separate the duties of your bookkeeping function to ensure a good system of checks and balances. Don’t put too much trust in one person — unless it’s yourself.
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Separate operational responsibility (actual day-to-day transactions) from record-keeping responsibility (entering transactions in the books).
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Reconcile the bank account. Assign this task to someone who is not handling cash or making bookkeeping entries. Review the reconciliation carefully.
