Bookkeeping is an important part of running your business. If you do not keep accurate records of your business expenses, you will not be able to prove them and therefore claim deductions. An auditor may disallow the deductions, burdening you with back taxes and penalties. If you do not keeping accurate records, you cannot be sure exactly what your business expenses were for any given year and you can end up paying excessive taxes on your return.
The sample journal entries illustrate what information is commonly written in an accounting ledger.
In any type of business, it is important to know how much money is coming in and how much money is going out. Money coming into the business is revenues; money going out is expenses.
Cash Receipt Journal
This is the amount of money brought into the business. This includes cash, checks, and your accounts receivable. For service firms, you should keep a journal at least on a weekly basis; for other types of firms, you should update it daily. The number of times you update your journal depends on how many transactions take place in a day. If you have many transactions, it is better to update frequently for greater manageability. Each journal entry should show:
- The date when the transaction occurred.
- The name of the person or the institution that wrote the check or paid in cash.
- The amount received by your company.
- The reason for the payment.
Cash Disbursement Journal
This journal records monies you paid out to run your business; you should try to pay with checks whenever possible, as it is easier to keep track of your financial picture. In this journal you should record:
- The date.
- The check number.
- The name of the payee.
- The amount.
- The reason for the payment.
The ledger is a document that summarizes all of the money that goes in and out of your business. You transfer information from your journals into the ledger. All of your transactions in the journals are then added and balanced at the end of the month.
If you do not make an entry at the point of sale, you should at least make record of all your sales on a daily basis. This will help you not only keep better records, but identify what is selling and what is not.
Accounts receivable are payments due to your company that you have not yet collected. For example, if you sold an item or a service with payment terms of 30, 60, or 90 days, then this transaction falls under your accounts receivable. You should register the sale in your cash journal when the money is actually received, not when the transaction took place.
The IRS expects you to be able to prove all of your deductions, so saving receipts or bank account information is crucial. If you are audited, you might be asked to produce this documentation years in the future. Make sure you create a good system for archiving and retrieving those records. It is a good idea to have an “in-box” where you can keep all your receipts, statements, bills, and other relevant papers. You or your bookkeeper will then sort through the material and put the right entry on the journals and ledgers.
As you can see, this is tedious work, and it is better to hire somebody to handle those records. If you want to tackle this yourself, however, then we recommend purchasing a software package such as QuickBooks®, popular small-business accounting software.