The actual process of keeping your books is easy to understand when broken down into three steps:
1. Keep receipts or other acceptable records of every payment to and every expenditure by your business.
a. Each of your business’s sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale.
b. From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you’ll want to choose a system that fits your business needs.
2. Record your business transactions on a regular basis.
Consider QuickBooks to keep track of your business financial transactions.
On some regular basis — like every day, once a week, or at least once a month — you should transfer the amounts from the checks that you have written, credit card receipts, receipts for sales and other transactions into your ledger or accounting software such as QuickBooks. How often you do this depends on how many sales and expenditures your business makes.
3. Summarize your income and expenditure records on some periodic basis (daily, weekly, or monthly) by creating financial reports.
Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you’re making or how much your business is worth at a specific point in time.
Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way: while your income ledger may tell you that your business brought in a lot of money during the year, you won’t know if you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time.
That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business.
The key reports you need to create regularly are a cash flow analysis, a profit and loss forecast, and a balance sheet. (Both QuickBooks and Quicken Home and Business, as well as other accounting software, can provide these regular reports.)
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.