Direct Marketing Article
Eleven Essential Bookkeeping Accounts for Any
Small Business Owner
By Lita Epstein
Detailed bookkeeping is essential to the success of every small business,
and even more essential for small business owners is understanding what your
books tell you about your business.
When you first started your business, you probably ran out of the gates with
lots of energy and ideas. You were focused on the big picture. Bringing in
customers. Creating new products and services that those customers would
love. Hiring great employees. Making the big bucks! You probably didn't
spend too much time sweating the small stuff, such as learning how to read
your business's books.
If that was the case then, says Lita Epstein, now is the time to correct
your course. She says, as a small business owner, if you don't understand
the accounts your bookkeeper uses to keep your business up and running,
you'll have absolutely no way to measure the success (or failure,
unfortunately) of your business efforts.
"No matter what business you're in, the ability to understand your books is
essential," says Epstein, author of Bookkeeping Kit For Dummies®
(Wiley, 2012, ISBN: 978-1-1181-1645-6, $34.99). "Often small business owners
are great at winning over new customers or creating new products or
services, but they're not so great at keeping a clear financial picture of
their business. As a result, they run into cash flow problems. They rack up
huge amounts in accounts receivable. Or they pay bills late.
"When you take the time to learn how to read and understand your books,
you'll have an excellent gauge of how well you're doing. It also provides
you with lots of information throughout the year, so you can test the
financial success of your business strategies and make course corrections
early in the year if necessary to ensure that you reach your year-end profit
Bookkeeping Kit For Dummies is a great way for small business owners
to start getting a handle on the ins and outs of bookkeeping. It provides an
easy and painless way to master the skill. You'll get clear and concise
information along with plenty of practice opportunities and examples to hone
your bookkeeping skills.
"To give you an idea of the kind of information you need, let's start with a
lesson on accounts," says Epstein. "Each and every account has its purpose
in bookkeeping, but all accounts certainly aren't created equal. For most
companies, some accounts are more essential than others. When you have a
firm grasp of the accounts your bookkeeper uses to manage your business,
you'll have a solid financial picture of your business, enabling you to make
better decisions and to run your business more efficiently."
Read on for a look at the most common, must-have accounts used in small
Cash. All your business transactions pass through the Cash account,
which is so important that often bookkeepers actually use two journals, Cash
Receipts and Cash Disbursements, to track the activity. "It's your
bookkeeper's responsibility to be sure that all cash-whether it's coming
into the business or being sent out-is handled and recorded properly in the
Cash account," says Epstein.
Accounts Receivable. If your company sells its products or services
to customers on store credit, you definitely need an Accounts Receivable
account. "This account is where you track all money due from customers,"
explains Epstein. "Keeping Accounts Receivable up-to-date is critical to be
sure that you send timely and accurate bills to customers."
Inventory. Every company must have products to sell. Those
money-making products must be carefully accounted for and tracked, because
it's the only way a business knows what it has on hand to sell. "Your
bookkeeper contributes to this process by keeping accurate inventory records
in an Inventory account," says Epstein. "The numbers you have in your books
are periodically tested by doing physical counts of the inventory on hand."
Accounts Payable. No one likes to send money out of the business, but
you can ease the pain and strain by tracking and paying bills in your
Accounts Payable account. "You certainly don't want to pay anyone twice,"
notes Epstein. "But you also want to make sure you pay bills on time, or
else your company may no longer get the supplies, inventory, or other things
needed to operate the business. Suppliers often penalize late-paying
companies by cutting them off or putting them on cash-only accounts. On the
flip side, if you pay your bills early, you may be able to get discounts and
save money with suppliers, so the early bird definitely gets the worm."
Loans Payable. Inevitably, your company will need to purchase major
items such as equipment, vehicles, and furniture. Unfortunately, you may
find that you don't have the money to pay for such purchases. "The solution
is to take on long-term loans to be paid over more than a 12-month period,"
says Epstein. "The Loans Payable account allows you to monitor the activity
on these loans in order to get and keep the best rates and make all loan
payments on time and accurately."
Sales. No business can operate without taking in cash, mostly through
sales of the company's products or services. "The Sales account is where you
track all incoming revenue collected from these sales," notes Epstein.
"Recording sales in a timely and accurate manner is a critical job, because
otherwise you can't know how much revenue has been collected every day."
Purchases. Purchases are unavoidable. In order to have a tangible
product to sell, your company has to either manufacture the product, in
which case you have to purchase raw materials, or purchase a finished
product from a supplier. "In the Purchases account, you track the purchases
of any raw materials or finished goods," explains Epstein. "The Purchases
account is a key component of calculating Cost of Goods Sold, which you
subtract from Sales to find your company's gross profit."
Payroll Expenses. You must pay employees to get them to stay around;
that's a fact of business. No matter how much you beg, few people want to
work for nothing. "To keep up with what is for many businesses their biggest
expense, you track all money paid to employees in the Payroll Expenses
account," says Epstein. "Accurate maintenance of this account is essential,
because it ensures that all governmental reports are filed and payroll taxes
are paid. And if you don't take care of these responsibilities to the
government, you'll find yourself in some serious hot water."
Office Expenses. One key expense that can drain a company's profits
is office expenses. "From paper, pens, and paper clips to expenses related
to office machinery, these expenses tend to creep up if they aren't
carefully monitored in the Office Expenses account," says Epstein.
Owners' Equity. Accounts related to owners' equity, which is the
amount each owner puts into the business, vary depending on the type of
business. "Many small businesses are owned by one person or a group of
partners; they're not incorporated, so no stock shares exist to divide up
ownership," explains Epstein. "Instead, money put into the business by each
of the owners is tracked in Capital accounts, and any money taken out of the
business by the owners appears in Drawing accounts. In order to be fair to
all owners, your bookkeeper must carefully track all Owners' Equity
Retained Earnings. The Retained Earnings account tracks any of your
company's profits that are reinvested for growing the company and not paid
out to the company owners. "This account is cumulative, which means it shows
a running total of earnings that have been retained since the company opened
its doors," notes Epstein. "Although managing this account doesn't take a
lot of time, the ongoing accuracy of the Retained Earnings account is
important to investors and lenders who want to track how well the company is
"Many business owners think of bookkeeping as a necessary evil," says
Epstein. "But in reality, if you understand and make effective use of the
data your bookkeeper collects, bookkeeping can be your best buddy when it
comes to managing your cash. The key to taking advantage of what bookkeeping
has to offer is understanding the value of basic bookkeeping principles and
using information collected. When you do this, you can run your business
more efficiently and effectively. Happy accounting!"
About the Author:
Lita Epstein, MBA, designs online courses about reading financial reports,
investing, and taxes. She's the author of Reading Financial Reports For
Dummies® and also writes periodically for AOL's Daily Finance.
Bookkeeping Kit For Dummies® is available at bookstores nationwide,
major online booksellers, or directly from the publisher by calling (877)