If you are just starting a business or have been in one for a while, you quickly understand the importance of keeping good records. And as a financial person, having an owner who understands the basics of great bookkeeping makes it so much easier to help that owner understand what those books are telling them and how they can improve the business. On that front, here are four keystone bookkeeping concepts worth discussing.

Selecting the proper accounting method

There are two methods for recording transactions:

1. Cash basis
2. Accrual basis

In general, the cash basis method records a transaction when a payment is made or cash is received, while the accrual basis method records the transaction upon delivery of the good or service, either as a sale or as a cost. Small businesses often use the cash basis because it is easier to track. Larger businesses that buy from vendors on account (accounts payable) generally use accrual-basis accounting. The key is to understand what method your business uses and whether it uses the same method for your books as it does on your tax return. The IRS allows most small businesses to use the cash basis method for tax purposes, but once a choice is made, it can only be changed with proper IRS reporting.

How important is the matching principal to your business? This aligns revenue with related costs to get a clean picture of interim profitability. If this is important, accrual might be best. What about the importance of cash flow? If high, using the cash basis will get you answers more quickly.

Create an account structure that fits the company

The main types of accounts in a business are:

• Assets
• Liabilities
• Equity
• Income
• Cost of goods sold
• Other expenses

Each group will often have numerous accounts and sub-accounts associated with it. Having the right mix of accounts, organized and grouped, will help you properly classify transactions and prepare usable financial statements.

If there is little activity in an account, consider summarizing it with other like items. Know why you need an account before you create it…to make business decisions? to compare to last year? for tax reasons?

Enter accurate and timely transactions

The value your data provides is dependent on each transaction being recorded correctly and on time. Entering transactions in the wrong account can cause major issues down the road. Delayed financial reporting can hide problems that need immediate attention. Some transactions are relatively straightforward, while others are more complex (such as payroll, accruals, and deferrals).

Conduct a flash report on the first day of each month. This will get the ball rolling.

Establish financial statements for decision-making

The purpose of your statements should be to help you run your business and make decisions. For the bank, it’s to see whether you are a high-risk borrower. To the government, it’s to pay taxes. Or for the prospective buyer, to value your company’s worth.

Really understand the three key financial statements (income statement, balance sheet, and statement of cash flows). Know how they interrelate and understand how to read them to make better decisions. What key accounts are the drivers of your business? What is the bank looking at?

Improve your bookkeeping

If properly implemented, your bookkeeping system will produce accurate financial statements that support key financial decisions. Feel free to contact our RRBB advisors to discuss bookkeeping solutions or to improve your business’s finances.