The Need for an Accounting System
What’s Wrong with Keeping my Records in a Shoebox or Why You Need an Accounting System
In numerous small business offices across the country sit shoeboxes or file folders full of important documents including receipts, invoices, and accounting data. As the months go by and the information begins to pile up it becomes more and more difficult to have a comprehensive understanding of the business’s financial state. The business is sitting on a growing problem which eventually will become its nemesis.
Granted while an accounting system is not as simple as a shoebox or file folder, it doesn’t have to be so complex you need a specially trained employee to use it. Personal finance managers are simple programs that automate check writing and record keeping . Double-entry systems are more comprehensive and include functions for general ledge, accounts receivable, and accounts payable.
A more comprehensive accounting system will collect and organize important business information and take a business beyond record keeping and provide important financial data for future planning. Bankers and investors will appreciate the professional appearance of the company’s books.
There are two methods for recording a business’s income and expenses: The cash basis and the accrual basis. The cash basis of accounting is the simpler of the two methods. Basically, it records income when it is received and expenses are deducted when they are paid. While it is the simpler of the two methods it doesn’t present as clear a picture of the company’s financial situation.
The accrual method will provide a more comprehensive view of the company’s financial position. Under this method income is recorded when a sale occurs or when services are provided even if no payment is received at that time. Expenses are recorded when they occur even if they are paid at a later date. All U.S. publicly traded companies and many private companies must report financial statements on the accrual basis. CPA opinions can only be rendered if the business’s financial statements are prepared on the accrual basis. If the business maintains retail inventory it will more than likely be required to use the accrual basis of accounting.
Keep in mind that a business is required to elect its accounting method on its initial tax return and any change from accounting method required IRS approval.