Small Business Book Keeping
Book keeping is a method of maintaining transactions that take place during the year. The moment a financial event occurs during the business hours it is recorded in the set of books maintained by the bookkeeper. Imagine X owns a small business concern where he sells some electrical goods, and if sales transactions takes place on 1-1-2007 between the owner X and the buyer Y for $20, and Y pays off cash immediately after buying the goods from X. the owner appoints his accountant A to maintain the track of all the financial events that take place. Therefore the accountant A has created many subsidiary books like purchase, sales, cash, journal and ledger.
After the sales transaction has occurred, he first presents the original copy of cash sales invoice to the buyer. Then he retains the original sales slip as an evidence for the particular sales transaction. He opens sales book and records the transaction in a proper format. He prescribes date, narration of the transaction; ledger folio number and the amount agreed i.e. $20 between the buyer and seller. Consequentially he enters the other sales transactions in the same format. He then opens his cashbook and enters the transactions in the similar format. Cash book usually consists of two columns ie. Receipts on the left side and Payments on the right side. If the same transaction would be a credit transaction, he would only enter in the sales book. When he receives cash after some prescribed days $20, he enters the transaction on that particular date say 04-01-2007 on the receipt side of the cashbook.
Sales book records the total sales that occur during the financial year whether credit or cash. Usually cash transactions and credit transactions are entered in two different books. Most of the firms maintain separate books for cash transactions and credit transactions. In the same way Purchase books records all the purchase transactions during the period both cash and credit. Cashbook on the other hand consists of all the cash transactions i.e. total cash receipts and total cash payments for the assessment year. Bookkeepers face some common confusions like: If the firm sells scrap papers lying on the desks and earns $10, whether the entry should be made in sales book or cash book? The following firm undertakes to sell electrical goods so only sales of electrical equipments are treated as sales. The other type of sales not relevant to the electrical goods must be treated as receipt and should be entered on the receipt side of the cashbook. Similarly purchase of electrical goods used for resale is considered as purchase. If the firm purchases stationary for office purpose it is not purchases but a kind of payment made for buying stationery.
Therefore on the payment side of the cash book the following entry should be made. The firm purchases a piece of desk and chair to comfortably have a seat and smoothly handle the office matters and promises the dealer Mr.D to pay cash after 3 months. Is it purchase or a cash transaction? The answer is that it is neither purchase nor a cash transaction but it is known as a journal entry. The bookkeeper should open his subsidiary book called journal and make entry in the following format. After entering the date, he must analyze the two aspects of bookkeeping i.e. the credit and debit side of the transactions. As furniture is an asset it should be classified under a heading ?Furniture a/c?. Assets are known as real accounts and the principle rule for real accounts is that ?whatever comes in the firm? is debit and ?whatever goes out? is credit. As the furniture is being bought into the business it is debit. Mr. D is purchasing furniture on credit basis and therefore he is the creditor. As the firm owes to Mr. D, his account should be credited as ?Mr.D?. Say the furniture is purchased for $20, and then the entry should be made in the following format.
Furniture a/c--_____Dr. $20
To Mr. D a/c $20
Therefore journal entries are those that can neither be recorded in sales book, purchase book nor cashbook. The bookkeeper must keep in mind the basic rules for journalizing the following points:
1. There are three types of accounts personal, real and nominal.
2. Personal A/c includes the names of persons and firm. in case of personal accounts if the particular firm or a person is a giver then his account should be credited. If Mr. A lends loan to Mr. B, then Mr. A a/c is credited in the books of Mr.B. If Mr.A borrows money from Mr. C, then Mr. A a/c is debited in the books of Mr. C.
3. Real a/c includes assets as mentioned above.
4. Nominal a/c includes fictitious items or intangible items like salary, commission, bonus, etc. the rule for nominal a/c is: Income is treated as credit and losses are treated as debits.
The process of making prime entries in the subsidiary books is known as journalizing. After the transactions are journalized they are entered into the ledger known as posting. The posting procedure takes place in the following way.
If Mr. M buys goods from the seller X for $10 and pays cash immediately, then entry is made in sales as well as cashbooks. In the ledger two separate a/cs are opened i.e. sales a/c and cash a/c. the following accounts are divided into two columns i.e. debit and credit. Under the heading sales a/c, on the right hand side ?by cash? is entered by the bookkeeper in case of cash transaction. If Mr. M buys goods on credit, similarly on the right hand side ?by Mr. M? is entered and when the respective person pays the cash after say 2 months, ?Mr.M? will be entered on the left hand side to close the balance that existed between Mr.M and seller X. the financial year usually ends on the 31st of March every year. on this date the bookkeeper opens all his subsidiary books and calculates the total sales, total purchases, total cash transactions that occurred during the year. He then opens his ledger books and determines the balance of the accounts at the end of the year. Imagine during the year if Mr.M has purchased goods costing $100 from Mr.X and paid him $50 till the end of the year then the closing balance of Mr.M will be $50 and hence for the next assessment year it will be the opening balance.
When the procedure of bookkeeping ends, accounting procedure starts which includes preparation of final statements like Trial balance, Profit & Loss a/c and Balance Sheet. The bookkeeper need not be well-versed in accounting matters but only should have the knowledge of making right entries and be accurate in calculations.
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