No matter if your running a business or just handling your own personal finances, it is important to keep acuarte records. It’s impossible to know how your business is doing, or how far you’ve gotten yourself in debt without an accounting system in place to help you manage your finances.
There are three important things you should know about accounting and creating your own bookkeeping system:
1. You can not successfully manage your business or your household without proper bookkeeping. (establish a system)
2. Every cent needs to be accounted for (keep it updated)
3. End of year tax reporting just got easier. (check in with a professional)
Setting up a business is a lot of work. If you’ve been following this blog you’ve developed a brand and a product and working on selling it through online and networking sources. Whether your an artist, crafter, or writer accounting is essential to helping make your business successful. But it’s tedious and boring, right?
Take it from this number girl, a few minutes a day of recording bills, deposits, and sales will not only save you money at the end of the year, but a lot of frustrations later. Those sales you are recording will later be able to present you with valuable information on what sales and what doesn’t. Let’s admit it, we’ve all had that one product that flops. We learn from it and move on.
Finances help us from having that flop draw us deeper and help us focus on what we’re doing right. It also tells us how much money we have to invest back into our business, contribute to our family income, and save for a rainy day.
A good formula for that is: 50% back into your business, 25% back to your family, and 25% into savings. This formula isn’t set in stone. Some may even wish to argue a different type of split. However, if your just getting started with your business you need to invest a little more into your business in the beginning in order to set a sound foundation for in the future. You never know when you might hit a “dry spell” in sells or need to restructure. You can always go back and readjust the formula later when you have a better idea of what your profits look like for the year and can adjust accordingly.
That’s why it’s also important to maintain accurate booking records. It’s really no different from your check book. You make a sale you record it and place the money into an account. You buy something, you take the money out of the account and record where the money went. Beginner business owners may use a spreadsheet or an inexpensive accounting program. I personally, am fond of Quick Books. It’s an easy versatile program and we’ll talk about accounting software at a later date.
Now lets move on to why we must account for our money down to the last cent. How many times have you said, “keep the change” when making a purchase? In accounting, by recording everything that comes in and goes out to the penny, you will know exactly how much “change” has occurred throughout the year. If you stuck a penny in a bank every day for the next year, you’d have $3.65. That penny didn’t seem so significant on day one, but on day $3.65 that’s almost enough to buy a Happy Meal, right?
We call this debts and credits in the finance world. And I can understand how this may be a little confusing to some. Normally we’d think that something negative like a credit would be our expenses. Unfortunately, that’s not how accounting works. A credit is a negative number, but we count our deposits (income) as credits. And that would mean our expenses are debits. If you use a software program for accounting, it will help you by selecting accounts for you and placing these amounts in the proper place for your end of year financial statements.
It’s always a good idea to have an accountant take a look at your bookkeeping at the end of the year, especially in assisting you with end of year tax reporting.
Which leads us to the third important thing you need to know about accounting and bookkeeping.
Yep, I know I just said that dreaded word that know one likes. Ask any politician we’ve heard promising to lower our taxes. While we all know their promises are most likely a marketing ploy to get our vote, I’ll promise you this when it comes to financial taxation, you will save yourself a lot of frustration and stress at the end of the year by having a proper bookkeeping system in place for filing your end of year taxes. Proper bookkeeping can also help you plan ahead, so there are no surprises of the IRS showing up on your doorstep and holding out there hand for the money you owe them.
You can save money by saving your accountant time on having accurate financial statements in advance. I can attest by the dozens of shoe boxes of receipts that I’ve sorted over the years. Please note, shoe boxes are NOT bookkeeping systems.
There is so much more to know about accounting and bookkeeping, but the first step is to just establish a system, keep it updated, and check in with a professional once in a while.