When you balance your personal cheque book, you record transactions as a single line when they happen, with a description of what the transaction was, and whether it was income or an expense.
With a business, you will usually need something more detailed than that.
The Flow of Transactions in Your Accounts
While some small businesses do simply take a cash payment for a product or service, often, the work is done in a more complicated way.
For example, you might buy some stock and be invoiced for it later, then pay within 30 to 90 days.
Or, you may deliver goods to a customer, invoice them, and have them pay by instalments.
In some cases, you may do both, buying stock and paying for it on account, and then using that stock to supply a customer who also pays on their own account.
So, you owe money for that stock, and you are owed money for the work that you have done for it.
Keeping that balanced, making sure that you have positive cash flow, and that you can pay all your bills, can be confusing and tricky.
Where Should You Record Transactions?
To perform proper bookkeeping, you should understand the difference between books of original entry, or journals, and ledgers.
In accounting, the first place that a transaction is recorded in the journal.
From the journal, the transactions are then moved to ledgers, and you want to make sure that those all balance.
In double-entry bookkeeping, two ledgers are updated with each transaction, to make the books balance.
If you are using accounting software then you will find that a lot of the work is done for you and that it is relatively easy to make sure that entries go to the correct place.
If you’re using a spreadsheet or a paper system then you will need a strong understanding of the respective journals and ledgers to ensure that everything goes into the right place.
Managing Your Journals
For the average small business, the general journal is the most important thing. This is where debits and credits are entered.
So, if you pay wages out of your bank account, that goes into the general journal. If you take out a loan, that also goes into the general journal.
Money from customers would be entered there too, as would rent that you pay, etc.
The journal is a chronological list of transactions. You need to then write them into the ledgers.
Every transaction that appears in the journal needs to also go into an appropriate ledger, which will update the balance for each account with the company.
This is how you can see at a glance what ‘accounts receivable’ and ‘accounts payable’ the company has.
If your company is large and complex and has a lot of different categories of transactions then you might want to have several subsidiary ledgers.
For example, you may not want to have one huge accounts receivable ledger if you have hundreds of customers that all spend a lot of money.
You might separate those accounts so that each client has their own ledger, and then summarise that for ease of reading.
It is good practice to run regular trial balances, to make sure that the accounts add up.
The trial balance is not a report that investors or the taxman will see. It is a simple ‘check’.
If it does not balance, this means that there is a mistake in the general ledger somewhere.
Running trial balances on a regular basis will alert you to missing transactions, typos, or other errors so it is something that most bookkeepers do frequently.
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