Your bookkeeping system is the financial heart and lifeblood of your business. When set up and operating properly, your books help you make smart decisions and seamlessly turn your financial data into useful information. Here are four key characteristics of maintaining a healthy bookkeeping system to keep good business records.

1. Select the proper accounting method

There are two different methods for recording transactions: cash basis and accrual basis. The cash-basis method generally records a transaction when there is a payment, while the accrual-basis method books the transaction upon delivery of the good or service. Cash basis is easier to track and a helpful option for smaller businesses and sole proprietors. Larger businesses that buy from vendors on account (accounts payable) generally use accrual-basis accounting.

Selecting the proper method affects any related financial transactions and the display of your financial statements. A correct approach will also consider outside factors, including IRS rules (businesses with more than $25 million in gross receipts must use the accrual basis), bank covenants, and industry standards. You can always change your choice, but you must remember to report it properly to the IRS.

2. Create an account structure that fits the company

Every business’s bookkeeping system includes a chart of accounts. These accounts sort the business’s transaction data into six meaningful groups:

1. Assets
2. Liabilities
3. Equity
4. Income
5. Cost of goods sold
6. Other expenses

Each group will often have numerous accounts and sub-accounts associated with it. Having the right mix of accounts, created and grouped in an organized fashion, will help you properly classify transactions and prepare usable financial statements. The proper account structure for your company will mesh with your specific information needs to keep good business records.

3. Enter accurate and timely transactions

Your data’s value depends on the record of each transaction being correct and on time. Entering transactions in the wrong account can cause significant issues down the road. Delays in financial reporting can hide problems that need immediate attention. Some transactions are relatively straightforward, and some are more complex (like payroll, accruals, and deferrals).

It’s essential to have someone who understands both your business and the accounting rules to enter your transactions promptly. In addition, a good month-end close process that involves reviewing each account will help you identify and correct mistakes from the initial entries.

4. Establish financial statements for decision-making

The main financial statements are the income statement (income – expenses = gross profit), the balance sheet (assets – liabilities = equity), and the cash flow statement. Each statement has a specific purpose:

• Income statement. The income statement shows company performance for a select period of time, typically monthly, with a full-year summary. It restarts at the end of each year.
• Balance sheet. The balance sheet displays a company’s overall health on a specific date. It is perpetual, which means it doesn’t end until the business is closed or sold. It includes one line that summarizes the current year and prior year results from the income statement.
• Statement of cash flow. This statement summarizes the inflows and outflows of cash. It ensures you know whether you have enough money and the pattern of your cash position over time.

If properly executed, your bookkeeping system will create accurate financial statements that can be used to make key financial decisions. Feel free to contact our RRBB advisors with any questions on how to keep good business records.