Basic Bookkeeping for Small Business

A Business Access information sheet [3.2]

Updated: 21 June 2001 ! www.businessaccess.vic.gov.au 2001, Department of State and Regional Development Page 1
The purpose of this document is to specify and describe those financial records that
must be maintained by every business enterprise. These records must be kept to
conform to either Company or income tax legislation or both.
Many business people believe that legislative requirements are the only reason why records should be
kept. However, your records provide information vital to you in the day to day operation of the business
and vital for the preparation of your end of year financial statements and income tax returns.
In addition to these financial statements, regular periodic reports should be prepared and used
intelligently to alert you to how your business is progressing. Your records should include information on
profitability, cash flow, and statements comparing actual expenditure with predetermined budgets.
The following represents the basic bookkeeping records that should be maintained by business
proprietors:
! bank statements ! sales invoices
! sales journal ! receipt books
! cheque butts ! bank pay-in books
! cash book ! petty cash book
! orders ! creditors invoices.
These types of records are considered in detail below.
Bank statements
Every business proprietor should open a trading account at his local bank. All cash received should be
banked intact preferably on a daily basis. All payments should be made by cheque. If this discipline is
followed, any bookkeeping system will be relatively easy to maintain.
Arrangements should be made to have bank statements collected from the bank weekly. Where there is a
high volume of cash, cheque, and credit card transactions it may be preferable to collect bank statements
daily. Only by a frequent and regular review of the bank statement can a business proprietor safely
monitor the cash status of his business.
Sales invoices
These will normally be printed and will display such items as business name, address and telephone
number. Also the name of the proprietor, the firm logo - if there is one, the State of incorporation if the
business is structured as a Company and the invoice number. It is also useful, from a marketing point of
view, to include a description of the goods or services being offered eg. "Leaders in the Field of Sporting
Equipment".
An invoice is made out whenever a sale occurs. Information on the invoice should include:
! date of sale
! order number or other reference from customer
! name and address of customer
! full details of goods or services sold
! amount charged to customer. If relevant, the amount of sales tax should be shown as a separate item
and included in the final invoice total
! whether the sale is one of cash or credit. A credit card transaction is best treated as cash.
Invoices should all be pre-numbered. To maintain internal control over sales, all invoices should be
accounted for and recorded.
Sales journal
This book is sometimes referred to as a day book and is used to record every invoice, whether the invoice
is one for cash or for credit. It thus represents a record of all sales and should be totalled daily, weekly
and monthly.
Basic Bookkeeping for Small Business
A Business Access information sheet [3.2]
Updated: 21 June 2001 ! www.businessaccess.vic.gov.au 2001, Department of State and Regional Development Page 2
An up to date knowledge of the level of sales is important to any proprietor in a business particularly
insofar as monitoring the break-even position is concerned and comparing the actual performance with
pre-determined budgets. The sales journal can also be used to "post" debit entries to the debtors ledger.
This record forms the basis of debtors control or book debts outstanding.
Receipt books
The simplest forms of receipt books are the pre-carbonised duplicate variety. The top copy is provided to
the customer while the duplicate copy, which remains in the receipt book, is used as a basic source
document for listing in the cash book.
There is an advantage in issuing a receipt, or at least making out a receipt, for each and every sale. The
more important reasons are set out below:
! In respect of credit sales, control can be exercised over the firm's debtors. The receipt book can be
used to list all receipts for credit sales into the cash book (see below). The cash book in turn is used
as a posting medium to the debtors ledger. From a recording point of view it is the sales invoice that
raises the charge against the debtor; and the duplicate receipt causes the unpaid balance to be
reduced or extinguished.
! A receipt should also be made out from the receipt book every time a cash sale is made. The receipt
should clearly indicate that the sale is a cash sale. It is sound business practice to bank all sales
proceeds on a daily basis. If this is done the total of all cash receipts should reconcile with the total of
cash deposited into the bank as cash sales. If there is any variation between cash receipts and cash
deposited, further records should be kept identifying the nature of the variation. For example it is
sometimes necessary to use cash from the till to pay small items of expense.
This type of expense should be kept to a minimum. Where it cannot be avoided, a strict record should
be kept of the nature of the expense. Apart from being sound business practice such records are
required to comply with expense substantiation requirements under income tax legislation. (Refer also
notes relating to petty cash transactions.)
Where a cash register is used the cash receipt takes the form of a tape built into the register. The total of
the tape (often referred to as the Z setting) should agree with the amount of cash banked each day. Again
any variation should be explained and kept on record. The cash register tape is a very useful record in
that apart from recording sales values, it can also provide an analysis of types of sale, numbers of
customers, the time of day when sales are made and other useful information for prospecting and
marketing purposes.
A cash register tape does not, however, provide the all-important customer name and address. This is
why you should make out an invoice for all sales, including cash sales. The name and address of your
customer represents valuable information for your future marketing plans.
Cheque butts
As referred to above, all payments should be made by cheque. No records then need to be committed to
memory and meaningful analysis can be undertaken for the purposes of managing the business. Each
cheque butt should record the date, the name of the creditor, the nature of the expenditure and the
amount.
Bank pay-in books
Also known as bank deposit books. In the same way that all payments should be made by cheque, all
takings should be banked in full. The pay-in book should record the date of banking, a list of cheques
received, and cash dissected by notes, and credit card slips. The total banked should agree with the total
of receipts made out.
Cash book
This is probably the most important basic bookkeeping record as it summarises every item of cash that is
deposited into or is paid from your business bank account. For convenience, it may take the form of a
pre-ruled 17-column book obtainable from most stationers.
Basic Bookkeeping for Small Business
A Business Access information sheet [3.2]
Updated: 21 June 2001 ! www.businessaccess.vic.gov.au 2001, Department of State and Regional Development Page 3
It is important to keep the cash book continuously up to date. All columns should be totalled and cross
balanced even if the totals are only jotted down in pencil. Periodically the balance shown on the cash
book is reconciled with the balance shown on the statements received from the bank. This procedure
ensures that discrepancies have not occurred.
Payments made in cash
! keep to a minimum;
! do not make payments from cash sales;
! use a petty cash imprest system and maintain a petty cash book and a petty cash tin.
Filing
! file dockets relating to expenditure in cheque number order;
! maintain remittance advices and other documents relating to non-trading income in a special file;
! new assets (motor vehicles, plant, furniture, etc.);
! keep copies of invoices aside in readiness to give to your accountant;
! keep hire purchase agreements and lease agreements in readiness to give to your accountant.
Petty cash book
Previously it was suggested that all payments be made by cheque. In practice this is not always possible
and certain sundry payments may have to be made by cash (eg. donations, tips for garbage disposal,
staff provisions etc.) Rather than "dipping into the till" to pay for these items it is preferable to draw a
cheque for an "imprest" amount of petty cash - say $100 - and record each time this cash float is used.
Record the date, name of payee, amount spent and nature of expense in a petty cash book provided for
this purpose. In these days of having to "substantiate" items of expenditure it is essential to maintain
complete records, including vouchers, to support taxation claims for expenses at the end of the financial
year.
From time to time a cheque will need to be drawn for petty cash to reimburse the petty cash tin up to the
amount of the float. For example if $82.50 has been spent there will only be $17.50 remaining in the tin. A
cheque for $82.50 should therefore be drawn, cashed and that sum placed in the petty cash tin for future
use.
Orders
Each time you order goods or services it is sound practice to write out an order. By using a pre-numbered
order form, quoting the number to the supplier, and mailing the top copy of the order to them, disputes
concerning supplies, quantities and prices are reduced. The supplier will soon understand that the
business-like approach you take with your ordering procedures will not allow them to argue later about
details. Information on the order should be as comprehensive as possible.
Creditors' invoices
As soon as these are received, they should be checked with your order form. The invoice should then be
checked against the goods received. Only in this way can there be an effective stock control system. Any
shortages or errors of fact should be notified to the supplier promptly.
Once checked, the invoices can be filed in an A - Z file or cabinet. Provided you comply with the suppliers
trading terms, an ideal system is to pay all suppliers once a month. An effective way of paying creditors is
to allot, for example, one day a month to the settling of all debts. Care should be taken to ensure that all
invoices are taken into account when administering this task. Overlooking unpaid invoices can prove very
costly to a firm's cash flow.
Stock
Around the 30th of June each year, carry out a physical stocktake of all trading stock. List every item of
stock on pre-ruled stock sheets. File these stock sheets for possible investigation by the Tax Office. Value
stock at cost unless the market value of the item has fallen below cost. If this is the case, value the item
at market value and mark 'market value' on the stock sheet.
Basic Bookkeeping for Small Business
A Business Access information sheet [3.2]
Updated: 21 June 2001 ! www.businessaccess.vic.gov.au 2001, Department of State and Regional Development Page 4
A manual or computer system?
The previous paragraphs presuppose that a manual system of bookkeeping records will be maintained.
However in today's commercial world the computer is assuming a dominant role. Computer literacy is a
desirable objective for all business people. As a business develops, the need for computerisation
becomes obvious and computer systems will probably need to be introduced.
Most successful computer systems are developed from successful manual systems. While it is difficult to
generalise, it can be said that the implementation of a sound manually operated bookkeeping system will
provide a strong basis of management control for any new business. Once implemented, various
computer systems can be researched over a period time, to determine efficiency and cost saving benefits.
In that way the accounting system in place will become fully understood and its value appreciated. This is
something that may not happen if a very costly and hastily introduced computer is first installed.
In considering the type of manual system to use, it may be worthwhile looking at some of the "one-write"
systems available in the market place. For example a cash receipt may be made out for a customer.
Beneath the receipt is the customer's ledger card and beneath the ledger card is the cash book. Thus
three necessary operations can be completed in one fell swoop. Even a computer may struggle to
improve on this.
Conclusion
A simple bookkeeping system can be operated in a number of ways. The books and records referred to in
this information sheet are listed by way of guide only. Under normal circumstances they can be
maintained by the business proprietors themselves.
However if those proprietors find the task too difficult they should adopt any of the following procedures:
! attend a course about records and cash flow
! engage the services of a bookkeeper
! engage the services of an accountant.
See other Information Sheets in this series for further information about keeping books,
buying software or finding an accountant.