The elements of an accounting system are designed to control the financial transactions of your company and will change as the organization changes. For any system to be useful, it must be simple and easy to use. The basics of this system are simple and can be accomplished in a few minutes each day. Let’s begin with a company that is in the start-up phase, and follow through to a company that has employees.
When you are planning to open a business, start by establishing a company bank account. If you run your business out of your personal checking account, you risk creating a false economy. The distinction between personal and business transactions often becomes blurred. You may believe the company is performing better or worse than reality, based on the bank balance — this can be dangerous. Additionally, at some point, you or someone else will be required to separate the information, often a long and involved process. Your financial institution will provide you with a chequebook that has cheques attached to stubs. Use these stubs as the starting point of your accounting system. Each stub will have a place to record deposits, payments, and other charges. There’s also a place on the stub to record the opening and closing balance in your bank account.
Record each and every deposit or withdrawal of funds from your company bank account. Record the date of each transaction, the amount, with whom the transaction was made, and why you made it. Cross-reference every invoice, receipt and payment to the cheque number used in paying it, and keep these slips in a file sorted by cheque number.
In the pre-opening time period, you will often pay for miscellaneous expenses out of your own pocket. Keep the receipts for these expenditures in a separate file; they may be deductible. The general rule for documenting any transaction is “the more description, the better”. This simple set of stubs and files will allow you to move into the next accounting system, which you will need once you actually open your doors for business.
Once the doors are open, you must deal with a new set of issues — revenue transactions. Part of your new business setup should have included some sort of sales record, maybe even a cash register. You will need to create a receipt for the customer and keep a duplicate for your records to help account for each sale. As a minimum, you should be able to determine the amount of the sale and the amount of the sales tax collected. At the end of the day, you will need the following three numbers: gross cash collected, total sales, and total sales tax. Record this daily information on a simple columnar sheet of paper called the monthly sales journal. If you only have cash sales, you will need at least five columns. Record the three totals in the first three columns. In the fourth column, record “cash payouts,” which are payments made straight out of the till for miscellaneous expenses. The final column is used to record bank deposits. Now for a simple cross-check for cash sales. Sales plus sales tax will equal gross cash collected. Bank deposits plus cash payouts will also equal gross cash collected. Balance these five columns each day, and total them at the end of the month. You may consider a sixth column, commonly called cash over/short, to record any differences.
This simple method of sales recording, along with your cheque stubs (keep that earlier system going!), and your monthly bank statement, will give you the very basics of an accounting system. Do not forget that all of your source documents (receipts, invoices, register tapes, etc.) are the backup support for these accounting records. Place the sales records in a brown manila envelope for each month. Keep your cash paid-outs in a separate file. Finally, collect and organize your complete bank statement (cancelled cheques included) in an envelope clearly marked with the appropriate date. This takes care of your paperwork.
Accounts payable and accounts receivable
Accounts Payable represents your outstanding invoices (or bills) for goods and services received but not yet paid for. Keep these invoices in an accordion file with different slots for each day of the month. Once you have examined an invoice and have approved payment of it, determine the due date and place it into the slot matching the payment date. When you are ready to write cheques, pull the relevant dates and start writing. File the paid invoice with the other paid invoices and receipts in cheque number order. At the end of the month, sort all of the unpaid invoices as to the type of expense, total each of the types and run a grand total for all of the payables.
Accounts Receivable works in a similar fashion. In this case, you will be writing the invoice. Sort these unpaid invoices by customer and file in an alphabetic folder. When a customer pays their invoice, file the invoice with the other paid invoices. At the end of each month, total the unpaid invoices for each customer and create a listing of all receivables by customer. Do this on a columnar pad so that, in addition to the total, you can also create subtotals for the length of time outstanding. Usually, this is done in 30-day intervals.
The first employee
At some time, you may need to hire your first employee. Our government is very fussy about how you manage the payroll of your employees. Prior to hiring your first employee, you must register as an employer. During this registration process, you will be provided with the government forms required in your area. You may wish to get someone with payroll experience to help you through the maze of paperwork.
To assist you in the simple calculation of your payroll, a number of good payroll books are available at your local business supply store. They will all have a place to record the hours, rate, and gross pay. Next will be a section of other deductions and incomes for that employee. Finally will come the statutory deductions related to CPP, EI, taxes, and the like. This book, along with the tax tables provided by the government, will allow you to calculate the net pay. Always take a moment and double-check your calculations. Remember that government reporting is fairly strict in this area. Make sure your records allow the periodic reporting of totals and employee information.
All of the above will provide you with the basic information necessary to put together a financial statement for your company. This won’t cover all the accounting necessary, but at least you should be able to get an idea of where you stand. On a sheet of a paper record, your total sales from the sales journal prepared earlier. This is your gross revenue for the month. Next, list your categories of expenses, using your cheque stubs and your accounts payable listings. Group together similar expenses and try to keep the number of expense classifications low. Into this listing add any other charges from your bank statement, add the employer share of payroll taxes, and subtract the previous month’s accounts payable listings. This should be your total expenses for the month. The difference between expenses and revenue will be a rough estimate of your net income. Be cautious about the results you see, since your statement will not contain other entries such as inventory, taxes and depreciation. These have a major effect on the bottom line. Take the monthly totals for all classifications and add them to the year-to-date amounts from last month. This will give you a new year-to-date picture of your operation.
The above provides you with a systematic way to organize your financial information. Each type of record should be completed as it occurs. Taking a few moments each day will greatly increase the accuracy of your records and make it easier for you to understand your financial information. We encourage you to periodically engage professional help in order to have a more secure view of your financial position. This basic system will allow you to maintain control and will likely reduce the fees charged by an outside accountant to write the workup for you.