Developing Your Accounting System

Your accounting system is more than just the physical ledger or accounting software program you use.

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It encompasses the method you setup and use to …

... track each receipt received and invoice issued as it progresses through your record keeping system …

... to the final products - a set of financial statements and accounting reports along with your annual tax return.

Welcome to Bookkeeping Essentials - The System!

There are so many choices when you are starting up your business … and when your business is growing.

Just click on any underlined title of your choice and you'll go right to the page.

Accounting Systems Options

When deciding on your small business accounting system ... how do you decide what method is best for you and your business?

The article A Yardstick to Evaluate Your Book Keeping System has system criteria and questions to ask, to help you make the right decision.

There are times when a manual system is a perfect fit ... but I will tell you that the reason I don't use manual books for my business, is no reporting.

You spend hours compiling the data and have no reports ... and the inability to search or look up a transaction or series of transaction with the click of a mouse. It's virtually impossible to use any of the data to help me make business decisions. What a waste!

Entering data, without analyzing data, is operating your business on incomplete information. The computer reports generated by small business accounting software packages systematically organizes and summarizes your data in a way that is useful to making business decisions.

If you are a visual person instead of a numbers person, most small business accounting software can present the information graphically ... so you can easily see patterns or trends.

Having said all that, if you are doing manual books, you might be interested in how to do a quick calculation to see if you are profitable instead of waiting for the preparation of your tax return. Make sure you follow the link at the end for a quick method to estimate your cash flow as well.

Five components are essential in designing bookkeeping systems for the home based business. These components form the foundation upon which YOU, the owner will make informed business decisions.

Whether you are just starting out or have been in business awhile, how do you know if your book keeping system is the right one for your business? There are just so many choices.

In this article, you will find questions to ask ... and a list of criteria to help you make the choice that is best for your business.

This article discusses how some simple internal controls and segregation of duties can reduce the probability of fraud and help ensure that future tax audits go well. It only takes one bad tax audit or one successful embezzlement scheme to put your business' survival at risk.

Getting Organized
Simple File Organization Systems

Are you looking for a filing system for your business receipts? Small business accounting organization doesn't have to be complex to work.

You may just need simple suggestions to get your small business accounting organized in your office ... to eliminate stress and panic. Your accounting system won't work effectively without a good recordkeeping system.

What is the best filing system to get and stay organized so you can get rid of those drawers of stashed receipts? In this article I share my favorite filing system for keeping my business receipts organized.

If the only reason you keep bookkeeping records is for tax purposes (as opposed to helping you run your business), I suggest you look at this simple filing method. It has the added bonus of audit proofing your tax return. It will provide you with the small business accounting records you are required by law to keep.

If you operate a part of your business from your vehicle, file organization is key. This portable document filing system is perfect for you to organize your bookkeeping records!

Incorporate this filing system into your home office organization and small business accounting system to manage your business receipts efficiently. It will complement your accounting system.

Record retention requirements are determined by government for tax purposes. Get up to speed with these small business accounting requirements so you can be compliant.

This article explains what a source document (or supporting document) is. It will also discuss:

• Who must keep records
• What records must be kept
• How you must keep the records
• How long you must keep the records
• How to destroy records early

Accounting Systems Procedures and Set-up

When you are just starting your own business, the number of decisions to be made can be overwhelming. Your accounting system is just one of them.

You will find a listing and link to government initiatives that can assist you if you are a small business owner in Canada.

You'll also want to check out DonnaLynne MacDonald's Small-Biz-Help-Desk.com ... find out more in Other Resources.

1. The Blueprint of Your Small Business Accounting System - Your Chart of Accounts
2. Accounting System Procedures - Who Does What and How They Do It
• Account Receivable (AR) Collections Procedures
• Accounts Payable (AP) Management
3. Let's Chat About ... The Consistency Constraint

Plan ahead to customize your financial reporting package to meet your specific information needs. Use it as a tool to help run your business.

Accounting Systems Software Articles

This is the place to look for information on bookkeeping software packages that are a good fit with a small business operation.

You'll also find two chats I think you'll find interesting:

1. How to Change Your Bank Statement Into An Income Statement
2. Two More Accounting System Options to Consider

My preference is the QuickBooks accounting system ... so take a look at what I've written up so far:

• What Are QuickBooks Closing Procedures
• How to Track Cheques Issued
• How to Track Customer Deposits
• How to Track Construction Holdbacks
• How QuickBooks Handles HST/GST
  (includes how to track sales tax in a manual system)
1. if you are an HST/GST registrant
   (GST collected vs GST paid [ITC])
2. if you are NOT an HST/GST registrant

You will find QuickBooks tips for common bookkeeping entries, some shortcut keys, and how to avoid beginner's mistakes.

There is also The Learning QuickBooks Forum where questions and answers can be posted.

When you purchase something, write on the receipt what account it should be coded to by looking through your chart of accounts listing and selecting the appropriate account.

What is the Chart of Accounts

So if you haven't guessed, your chart of accounts (COA) is a list of all the accounts in your accounting system. You use it to categorize then record your transactions onto ledger pages ... each account listed in your COA has its own ledger page. If you use the computer, it is an electronic page.

All the ledger pages from all the accounts listed in the COA are called the general ledger (GL).

When you want a financial report, the accounts (ledger pages in the general ledger) are summarized to produce the financial report requested.

Your COA is the blueprint of your accounting system around which everything is built. If your COA is poorly designed, the quality of your information is affected ... which could affect the business decisions you make using the information.

Normally it is numerical but with small business accounting systems like QuickBooks, it no longer has to be numerical. COA are usually organized into seven sections that are used to summarize transactions for your financial statements. Do you recognize these categories from your balance sheet and income statement?

1. assets [1000 series]
2. liabilities [2000 series]
3. equity [3000 series]
4. revenue [4000 series]
5. cost of goods sold (COGS) and expenses [5000 and 6000 series]
6. other revenue [7000 series]
7. other expense [7000 series]

How to Setup Your Chart of Accounts

• If your internal financial statements are prepared on a tax basis, a good place to start is to have your COA based on tax form T2125. You can customize it later.

  For my American visitors, take a look at the tax form Schedule C (form 1040) to get started. You can find a copy on the IRS website www.irs.gov. You will find a link to the form under Businesses> Small Business/Self-Employed> Self-Employed.

  If you use QuickBooks, they have a whole selection of preset COAs. Just pick the one that is structured for your industry. Again, you can customize it later.

  QuickBooks has the ability to assign an account to a tax line ... so you don't have to organize your COA for tax purposes. You can organize your COA for your business or industry ... and let the tax mapping report assist you come tax time. It's the best of both worlds.

• You never want to have accounts that are too specific. For example, an account called utilities is good ... because it is generalized; an account named after a single customer or vendor such as Telus or BC Hydro is not so good ... because it is too specific.

As a general rule, an account should NOT be named after one product or service such as Size 10 Pants or Short Haircuts. It is better to name the account Clothing or Haircuts.

• There should be NO duplicate accounts. If there are, merge them into one account. If you have different departments or locations, a software program like QuickBooks can be setup to track them using classes, but it is NOT done through multiple accounts.
• Each account should be properly classified into one of the seven sections discussed above. This means capital asset accounts for equipment purchases should NOT be found in the expense account section.

  If you are using QuickBooks software, make sure you have setup the correct type of account ... not every account is a bank account type (the default). Loan accounts should be setup as a long term liability type NOT an income type.

• A good COA shouldn't need more than 50 or so accounts in a small business. If you have too many accounts, you are likely to have a lot of accounts with small balances under $100. It just doesn't provide useful information at that level and creates a lot of maintenance as each account has to be reconciled regularly.

  Fewer accounts will ensure you have greater consistency in where transactions are coded and recorded. This means you are more likely to have accurate financial statements you can rely on.

Why You Should Care About Your Chart of Accounts

Closing advice ... get very familiar with your chart of accounts. Understanding it may turn out to be your ah ha moment as it lays out the structure of your small business accounting system and shows you what makes up the numbers behind your financial statements!

Accounting System Procedures

Developing processes and procedures for your accounting system every step of the way in your business is essential so you can stop reinventing the wheel every time you start a new task.

Good practices and habits in bookkeeping mean accurate and timely financial statements to run your business with.

Here are some month-end procedures and internal controls you may want to consider implementing.

This short overview on daily, weekly, monthly, quarterly and annual bookkeeping tasks can help establish procedures and a routine.

Account Receivable (AR) Collections Procedures

In Stephen L. Nelson's book QuickBooks 2009 for Dummies, he gives a bit of advice on collections procedures. Here is what he recommends.

• Establish firm collection procedures; then follow them faithfully.


• When an invoice is one week past due, make a friendly phone call. Check to see if they have received the invoice ... or if there was a problem with the product or service. Solve the problem or ask when you can expect payment.


• When the invoice is overdue by one month, send a letter asking the customer to contact you about the past due amount. This is especially important if the customer promised you payment when you made your phone call a few weeks before.


• When the invoice is three months past due, stop selling to the customer as there is no guarantee you will be paid. Consider starting a formal collection process.

Universal Accounting's The QuickBooks Specialist Newsletter (it's free to subscribe) suggests these techniques to ensure you get paid:

1. Actively manage your accounts receivable accounts.
• Be familiar with your Aged Accounts Receivable Report and use it to actively manage your credit sales.
• Following the above collections procedures and the recommended AR tasks is a good start.
2. Automate your customer payments through scheduled electronic payments.
• PayPal is a very affordable method for a small business to use.
3. Pay a visit if you have sent regular invoices and statements, followed up with a phone call and letter and the amount remains unpaid.
4. Offer a payment plan if the client can't afford to pay the bill all at once. Universal says that if you go this route, you should discontinue services until the account is brought up-to-date.
5. If you find a large number of your receivables are overdue, it is time to hire a collection agency.

Do you need more incentive to regularly perform your accounts receivable collections? A direct benefit to you as a business owner is it gives you a method to verify that all the receivables are valid and that the sale(s) actually occurred ... a good internal control procedure to reduce the likelihood of fraud.

I read an excellent article today by Gary Barzel titled Using Your Accounting Software For Effective In-house Debt Collection. He explains that when selecting your accounting software, make sure it has the following features:

1. An Accounts Receivable Subledger tracking each individual's credit information and history in one place. Review and manage it to keep on top of your cash flow.
2. Easy access to the customer's credit information and history to make it easy to contact and follow up on outstanding payments.
3. Individual invoice tracking so you can see the status of each invoice.
4. The ability to prepare a collection letter that includes details such as the outstanding amount and date it was due.

Setting up procedures like the ones above are part of designing your accounting system.

Recording a bad debt allowance is closely tied to accounts receivable collections. Learn how to book a bad debt allowance.

You will find two AR ratios that may be a useful tool for you in Basic Ratio Analysis.

Let's Chat About ...

There is usually more than one way to do something ... and it is no different in bookkeeping.

The consistency constraint says that in order to have a high degree of comparability in your bookkeeping data, you must consistently apply the same procedures and methods from period to period.

It also means that industry practices should be taken into account ... so the information is useful and valid. Consideration should be given to substance over form when applying GAAP guidelines.

It is also imperative that any departures from this principle of consistency be fully disclosed on the financial statements.

This enables a reader of a financial statement to assume that GAAP has been followed consistently during the preparation of the financial statements.

So as a bookkeeper of small business accounting ... to ensure you have relevant financial statements, you must apply this principle to your data entry.

If you end up treating an item incorrectly (from your accountant's perspective), it is easy to make an adjustment if your accountant knows you handled every transaction in a consistent manner.

Why put this principle in place? ... So figures cannot be manipulated solely to increase or decrease the bottom line.

To profits and positive cash flow! ;-)

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