Peter Taylor is a Fellow of the Institute of Chartered Accountants and has many years' practical experience of advising small businesses, particularly in taxation and auditing. He lives: nr Stoke on Trent, Staffs, UK.
HOW TO KEEP YOUR ACCOUNTING RECORDS
We’ve looked at why you need to keep business records; now we’ll see how these records could be kept.
As we have seen, the type of records you need will depend very much on the type and size of your business. There is no point in starting a complicated bookkeeping system in a tiny business that doesn’t need such a system. It will only become a chore and the bookkeeping will soon become counter-productive.
We’ll start with the very smallest business and watch it grow. The business of some readers may have already passed this stage but it will still be useful to read this as we introduce the basic bookkeeping principles. The suggested routines should be enough for most small businesses and you should use those parts that apply to your business. Some businesses will need to develop their records in a slightly different order, and so you may have to tailor things accordingly. Everyone does things slightly differently. Although some things in bookkeeping are definitely wrong there is often more than one right way of doing things.
Keeping records to suit your business
For example, rather than using the basic cash book described in this chapter and in Chapter 4, you may wish to consider the use of one of the specialised cash books as described in Chapter 7. These are very useful for small shops or other small businesses where sales or purchase ledgers as such are not really needed. In a larger business you may want to consider computerised record-keeping or the use of one of the carbon-copy integrated ledger systems also described in Chapter 7.
If you have any employees you’ll need some sort of wages system to record their wages (see Chapter 6).
Various other records are often used to record the transactions of a business. These could include, for example:
- job costing records
- continuous stock recording
- equipment registers.
As these and other similar records are of a specialised nature they must be designed to best suit the needs of the individual user. Indeed you may want to develop your own. If you need more information about this have a word with an accountant first.
Using just a cash book
At the smallest level there is no need for expensive books to record the transactions. A cheap exercise book from Woolworths is probably all you need to record the transactions in the form of a basic cash book.
Keeping a separate bank account
It would, however, be wise to open a separate bank account for your business. This will in itself form a useful permanent record of your business. It will help settle any queries from the Inland Revenue or other government agencies. Also, by separating the business banking transactions from your personal banking transactions you’ll help yourself (or your accountant) to produce your year-end accounts. The bank will provide you with weekly or monthly bank statements, paying-in books and cheque books.
Apart from the bank details and the exercise book the only other records you’ll need to start with are the original purchase and copy sales invoices. We’ll look at these in more detail below.
Starting your cash book
The phrase cash book just means the book where you record cash and bank transactions (cheques, etc.). Normally the cash transactions and bank transactions are recorded in separate books although more complex systems are sometimes used to combine these in one book using separate columns for each. For anyone new to book-keeping this combined book can be confusing, and it’s best avoided if possible.
Figure 2 shows the typical ruling of the simplest cash book. This book is only used to record the bank transactions: a simple way to incorporate cash transactions is described on page 32. Here are a few simple rules to follow when writing up the cash book:
- By tradition, your receipts should be on the left and your payments on the right. Technically, the left-hand receipts page is called the debit whereas the right-hand payments page is called the credit. But you don’t need to remember these names.
- Do remember to enter the year at the top of the date column. It can be very difficult at times, when looking back, to work out which year you are looking at!
- When you enter the items in your cash book it is useful to record, as in the example, what the items are for. A brief note will help you (and your accountant) when checking back to see what expenses you paid.
- If you take money out of the business for your own use, or pay for some private item from the business bank account, then this should be recorded as drawings. Likewise if you put your own money into the business it should be recorded as a receipt marked Capital introduced and its source (e.g. your name) written beside it.
- When you receive money for sales in cash (notes, coins) it’s good practice to bank it intact without keeping any back to pay other bills. If you hold some back your records become far more complicated and there is the danger that part of the transaction will not be recorded, with complications and expense later on.
Each month check out the amounts received and paid against your statements (see below) and add them up (see Figure 2). Then record the difference between your receipts and payments. This represents the amount of money that the business has in its bank account. If the receipts (including the balance brought forward from the previous month) exceed the payments, then you have cash at the bank; in this case the balance should be ‘carried down’ as shown. If on the other hand your payments exceed the receipts then you’ll have a bank overdraft and the balance should be entered at the start of the payments column for the following month.
RUNNING YOUR BANK ACCOUNT
If you already have a personal bank account you will know how to operate a bank account. But it will pay you to open a second account for use by the business. To open your business bank account visit your local bank for a chat. However, there are some matters you should think about before you go:
- 1.What name is the account to be in? This could be your own name but if you have a trade name you might want that to appear on your cheques. For example, Mrs C. Dyche running a livery stable might want her business bank account to be C. Dyche t/a Christine’s Equestrian Centre. T/a just means ‘trading as’.
- 2.If you don’t already bank with the particular bank they will probably ask you for the names of two or three people they can approach for references. This is so that they can establish that you are of good character. Do ask the people that you name before you give their details to the bank.
- 3.Decide who is to sign cheques and how many signatures you will need on the cheques (e.g. both partners? two directors?).
- 4.Decide how often you need bank statements to be issued to you: generally once a month is about right.
Handling cheques and paying-in books
A cheque is a simple means of making payments out of your bank account. Do always record details of the payment on your cheque stubs so that you can write up your cash book later on. This might seem obvious but it is surprising how often people forget. In the same way, use your paying-in book to pay money into your bank account. Once again the details from whom the money was received and why (e.g. sales) should be noted on the counterfoil. Unfortunately some banks don’t make provision for recording the details on the face of the counterfoil: if so write the details on the back.
Transfer the information from your cheque book and paying-in book to your cash book on a regular basis. Some people do this once a week, others once a month. It depends on how many transactions there are. It’s best not to leave it too long, and certainly not more than a month.
Drawing up a bank reconciliation statement
Each time you receive your bank statement, check the entries on the statement against your cash book. This will bring to light any payments from the bank account that you haven’t recorded, and any errors you may have made. It will also highlight the rare occasions where the bank may have made a mistake.
- Bank charges and standing order payments can easily be overlooked and omitted from your cash book: write them in as soon as you discover their omission.
Having checked that you have recorded everything, it’s a good idea to agree (reconcile) the balance on the bank statement with the balance in the cash book. Using Figure 2 let’s suppose that when you checked the items from the bank statement against the cash book you found that the payment to J Philips on 31 May was not shown on the bank statement. This is not an error: it is just that there hasn’t been time for the item to pass through the banking system (it generally takes about 3 days for the item to appear on your statements). In order to agree the balances you’ll need to make allowance for this, and write a simple reconciliation statement like this:
Bank reconciliation statement
Balance as per bank statement – 31 /5/200X
Less unpresented cheque
Balance per cash book
Of course, there may be several unpresented cheques, or there may be some items that you have paid into the account that have not been recorded on the statement. Appropriate adjustments should then be made. Keep all the reconciliation statements you have written out. They will be useful if any queries arise on the bank account, and will help your accountant at the end of the year.
Dealing with cash payments
Most of your business expenses are best paid by cheque so that you keep a permanent record, but there will be some payments you need to make in cash (window cleaner, postage stamps, car parking, etc.). The simplest way to record these is to:
- pay them out of your own pocket and
- make out a corresponding expense voucher (see Figure 3).
Any receipts that you can get (e.g. car park tickets) should be clipped to the expense voucher. At the end of the month (or when it totals a reasonable amount) you should write a cheque on your business bank account, payable to yourself (or to cash) to reimburse yourself. File the expense vouchers on your paid purchase invoice file to match the payment that the business has made by cheque.
So far we have dealt with receiving and paying out money for your business. But of course you will need to know how much to pay for your purchases and others will need to know how much to pay you. This is where invoices come in. An invoice is a simple document listing the goods or services provided and stating how much is due to the supplier. Your business will receive invoices for its purchases and you in turn will have to issue invoices to your customers for sales you make to them.
The invoices will thus be two sorts: purchase invoices and sales invoices.
Receiving purchase invoices
You will receive purchase invoices, not only for goods that you buy but also for services such as telephone charges and rates. Accumulate these invoices in an unpaid invoice file until you are ready to pay them. When you pay them mark them ‘Paid’ and record the date of payment and ideally the cheque number. You should also transfer them from the unpaid invoice file to a paid invoice file. For the unpaid invoice file use the pocket or box type; for the paid invoice file use a lever arch or ring type available from most stationers. The paid invoices should be filed according to date of payment.
Issuing sales invoices
The type of sales invoice that you issue to your customers will depend on the nature of your business. Suppose you run a shop: all your sales are cash (no credit allowed). In this case you’ll only need to issue a simple receipt to your customers, if asked. But if you sell goods on credit you’ll need to issue invoices to your customers, to tell them how much to pay. There are two ways you can issue your sales invoices:
- by using a duplicate invoice book obtainable from stationers
- by getting a supply of blank invoices specially printed up (e.g. like business letterheads).
Using a duplicate invoice book
The easiest way of using the duplicate invoice book is this:
- 1.Write the invoice out making a copy with the carbon paper provided. Give the top copy to the customer and keep the carbon copy in the invoice book.
- 2.When the customer pays, mark your copy of the invoice in the book with the date and amount paid. If it is paid in full, fold the top right hand corner of the invoice over.
- 3.At the end of each month any invoices not folded over remain unpaid. You should then normally send a statement to the customer of the amount still owed to you.
Using specially printed invoices
If you want something a bit smarter, then printed invoices might be the answer. It’s more expensive than the duplicate book method but, depending on the type of business, it may be a worthwhile expense to impress your customers (and encourage them to pay!). Alternatively you could print your own invoices from your computer which can include graphics to give them an impressive look. A system for these invoices might be as follows:
- Prepare your invoices (handwritten or typed) in duplicate, using carbon paper. Note: the second copy (which is for your use) could be on plain paper. If you have prepared your invoices on a computer, just run off a second copy.
- Send the top copy to your customer and put the second copy in an unpaid invoice file.
- When the customer pays mark your copy invoice with the date and amount paid, and when fully paid transfer it from your unpaid invoice file to a paid invoice file (lever arch or ring-binder).
- At the end of each month the invoices in the unpaid file represent the customers who still owe you money. You should chase them for payment!
Recording cash transactions
As your business expands you may have more cash transactions; the system for dealing with them described on page 32 may no longer do. An alternative system is to keep a special book to record transactions in notes and coins separately from the bank transactions. You will also need to keep a cash float from which to make your payments.
Unless you pay all your takings into the bank without keeping any money to pay expenses in cash, you will need to keep some sort of record of your sales. You may use a till that automatically records the sales as you make them, but more likely in a small business you will just use a cash box for the takings. This is fine but you must make sure that you can establish the amount of sales. The easiest way is to use a daily cash summary like the one shown in Figure 4.
During the day you put the money from your sales in the cash box. If you have to pay any amounts in cash you take the money from the box but you make sure that you put a note into the box to record how much has been taken out. At the end of the day you list the expenses that you have paid out and you also record any money that you have taken out for your own drawings. Then by adding the expenses to the figure of cash in the box at the end of the day and adjusting for the opening float you
can calculate the true figure of sales. Each day you will need to transfer the figures to the cash record book (as shown at Figure 5). You should note the following:
- Record your takings (sales) each day from the daily summary list or till list. Note: it’s best to treat all sales the same way regardless of whether the customer has paid by cash or by cheque. If, for this purpose, you include cheques in the total of takings, it will simplify your records.
- Record the expenses as they are incurred. File the invoices for cash payments on a separate file from bank payments. Keep the invoices in date order.
- Periodically, say once a week, pay any excess money in your float into the bank. When writing up the record of cash transactions you should treat it as a payment since the money is being paid out of the float. In your record of the bank transactions (your cash book) you will record this as a receipt since the money is being received into the bank account. Confusion can arise on this point, but if the cash transaction is thought of as quite separate from the bank transaction then all should become clear.
If you bank the takings intact you won’t have to record them all separately in your cash book. You will, however, need to draw money from the bank to pay cash expenses, and these transactions should be recorded as follows. Treat the money drawn from the bank as:
- a payment in the bank records, and as
- a cash receipt in the cash records (using the words ‘Cash from Bank’).
Once again, if you think of cash transactions paid from the bank, and cash received into the cash float, quite separately, then the treatment of the transactions in your records should become clear.
- You should open a business bank account.
- The records you require will depend upon the size of your business.
- Don’t overburden yourself with a more complicated system than you need. Your bookkeeping system should work for you and not against you.
- The records described are the starting point for you to develop your own system. Remember that many of the ideas in later chapters are developments of the simple system so do read the description of the simple system first.
- There are alternative pre-printed accounts books available which are suitable for use with some types of small business.
- If you employ staff then you will need some sort of wages records: see Chapter 6.
- Open files for unpaid and paid purchase invoices. Transfer the invoices from the unpaid file to the paid file as you pay them.
- Decide what sort of sales invoices you need, obtain the invoices and set up the appropriate files if necessary.