- Bookkeeping tips [1], [2]:
We need to take into consideration the account payable and receivable. Demotech's bookkeeping method might need to be added these two columns in order to give a clearer vision on how much money that the organization can spend or can receive in near future. This is good for planning and budget.
One more point is not sure yet whether Demotech should save some space within her bookkeeping method in order to seperate revenue and expense. That means all spending and receipts will be divided into two parts: revenue and expense to easily see the result of the operating.
- Software [3], [4]:
Big E-Z and SOWAS are two financial software programs that are simple and easy to use. However, I have no idea of these two programs because I have not seen it yet. According to the text in the website, Big E-Z is compatable with MS Excel. This program is able to put all figures and data in the printing form and do all calculations and it is much easier than MS Excel. The latest version of SOWAS is 0.10-pre6 and it has a wide-range of ultilization than just using in bookkeeping. However, I need to check it out because it might be just gimmick that you can see everywhere on Internet.
- Single-entry bookkeeping system http://sbinfocanada.about.com/gi/dynamic/offsite.htm?zi=1\XJ&sdn=sbinfocanada&zu=http%3A%2F%2Fwww.cbsc.org%2Fontario%2Fenglish%2Fsearch%2Fdisplay.cfm%3FCode%3D8119%26coll%3DON_PROVBIS_E%26Origin%3DManagement, [5]
The single-entry bookkeeping system is quite the same as Demotech's system. However, this system keeps the income and expense separate. At the end, we will have income and expenses separately in two columns.
The article also talked about the advantage and disadvantages of two system: single-entry and double-entry. In the Demotech's system, we want to have advantages of double-entry system, too. That means we want to have a big picture including cash on hand, equity, account payable and receivable. However, the whole system has to be simple and easy; do not make people confused because of so many categories.
- Envelop sytem: [6]
Once again, the income and expense are kept separate because that is the main purpose of bookkeeping method, to keep track on what you have spent and received.
- Small business notes [7], [8]:
This shows a quite-the-same system as Demotech's bookkeeping method and it is useful and suitable for small or medium company or small family-owned enterprise.
One more thing that this system emphasizes is that "keeping the personal expenses separate from the company's"
Moreover, this website also presents all basic understanding of bookkeeping and accounting system. This is very helpful for reference to build up all rtelated concepts and connform a big picture of accounting and finance system.
The basis for every accounting system is a good Bookkeeping system. What is the difference between that and an accounting system? Think of accounting as the big picture of how your business runs -income, expenses, assets, liabilities- an organized system for keeping track of how the money flows through your business, keeping track that it goes where it is supposed to go. A good bookkeeping system keeps track of the nuts and bolts -the actual transactions that take place. The bookkeeping system provides the numbers for the accounting system. Both accounting and bookkeeping can be contracted out to external firms if you are not comfortable with managing them yourself.
- Cash basis accounting and accrual accounting [9], [10]
Accrual accounting seems to be able to solve the problems of Demotech's system like double-entry bookkeeping system.
Demotech's system is suitable for the newly-established small business. When it grows, this sytem will not be sufficient cause manager is not able to see the big picture for planning.
The idea of accrual and double-entry is the same and we need to figure out how to combine these sytem into Demotech's system but the bookkeeping method is still simple and easy to work on it.
Cash Basis Accounting
Many CPA's start out small businesses on cash basis accounting. That means that income is posted when the money is recieved and the expenses are posted when they are paid. For a very simple business, this is fine. In other words, if you collect the money when the sale is made, and you pay your bills in a timely manner, this should be sufficient for your business. It is easy and you don't have to track things like accounts receivable and money you owe. However, as your business grows, this will NOT be sufficient. At that time you will need accrual accounting.
Accrual Accounting
Accrual accounting posts the expense as soon as it is incurred, whether it has been paid for or not. It posts the sales revenues as soon as the sale has been made, whether the money has been collected or not. Why is this so important? Because you can track your actual expenses vs. sales to look for trends. You also track amounts due to you and amounts you owe. It is important to be able to review business trends. Did sales go up when you took out that new advertisement in the paper? Think about this example. Let's say you took out an ad in the newspaper for your new store. Due to a special promotion, the newspaper allows you to postpone payment for the advertisement for 6 months. Your ad runs in December and your sales double that month. With cash basis, your December sales would be high and advertisement expense would be zero. Six months later your sales would be low and advertisement cost would be high. It would look as if advertising isn't working. With accrual accounting, the advertising expense would have been recorded in December. Advertising and sales would both be high in December. Six months later, when advertising costs were down, sales would also be down.
Furthermore, with cash accounting, the debt owed is not even recorded. Your balance sheet would not reflect the amount you owe six months from now for the advertisement -not a very accurate statement! CPA's love to start out small businesses on cash basis, as I stated. It is a quick and easy system. BEWARE! It is NOT a good system. With the software available today, proper accrual bookkeeping is quite easy.
The comparison between these two system makes me aware of one question "Is there any possibility of combining these two systems?
Most small businesses (with sales of less than $5 million per year) are free to choose which accounting method to adopt. But if your business stocks an inventory of items that you will sell to the public, the IRS requires that you use the accrual method of accounting. Inventory includes any merchandise you sell, as well as supplies that will physically become part of an item intended for sale.
Whichever method you use, it's important to realize that either one gives you only a partial picture of the financial status of your business. While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.
And though the cash method will give you a truer idea of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month. To have a firm and true understanding of your business's finances, you need more than just a collection of monthly totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.
- Accrual-adjusted basis [11]:
The rule to remember when making the adjustment is that an increase (beginning to ending) in an accrual-type asset item will cause net income to increase, while an increase in an accrual-type liability item will cause net income to decrease.
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