In this blog, you’ll find out how to organize your business’s finances using a simple technique. It’s simple, free, and you can have it running in a matter of minutes. I want to talk about a quick method that you can use to start bookkeeping for your small business today.

Have you ever struggled with keeping a record of all of your sales and expenses? Can you tell me what your profit or loss for last month was? Maybe you’ve been stashing receipts in a shoebox under the bed.

If any of that resonates then congratulations, you’ve taken the first step towards grabbing your business’s finances.  The biggest reason that small businesses fail is poor cash flow management.

The accounting equation, debits, and credits, pretty much everything, is a direct consequence of one beautifully simple idea.

                          Assets = Liabilities + Equity

There are two equal and opposite sides to every business transaction because in the world of finance money can’t magically appear or disappear.

History

Double-entry accounting might be one of the greatest discoveries of the past six hundred years. But it was invented for merchants in Venice, who were doing complex trade with different groups of people. Not all modern businesses are as complicated as that.

So not all businesses need to use double-entry accounting. The alternative pre-dates double-entry accounting by literally thousands of years and it still has its place today. Especially when we’re talking about small businesses with minimal financial transactions.

Bookkeeping

Bookkeeping is what we call the process of recording all of your business’s financial transactions. And that one side that we’re going to recognize is an accounting entry to the cash account.

Single-Entry Accounting

As I previously stated, inadequate cash flow management is the leading cause of small business failure. Taking control of your cash account is the goal of single-entry accounting. So you’ve kept track of all the money that comes in and goes out of your company.

The single entry system, single-entry bookkeeping, or single-entry accounting. Whatever you like to call it. Is a bookkeeping system in which just one side of a company transaction is recognized as an accounting entry? And what’s great about this system is that anyone can do it. It’s simple and practical. All you need to get started is Excel or Google Sheets

Google Sheets

I like to use Sheets because it’s free, everything is safely stored in the cloud, and all you need to do to get started is have a Gmail account. And this is what a single entry system looks like in its simplest form. We have a table that summarizes all of your business’s transactions in a cash ledger. Which is another name for your cash account. This is called a three-column ledger because we have three columns for date, description, and amount.

Let’s do the bookkeeping for your first month in business. Imagine we’ve gone back in time.

Example

It’s January 2000, the new millennium. The Prisoner of Azkaban came out six months ago and you’re desperate to get started on your fan fiction. The first thing we need to do is identify the accounting period. We now need to enter all of the transactions that happened in January. At the start of the month, your opening balance was zero.

This is a brand new business so there’s no cash, to begin with. You decide to head down to the bank and open up a new checking account. That’s a good call because you don’t want to get all of your business and personal expenses are mixed up.

Owner’s Equity

On the fifth, you decide to transfer five thousand dollars into your new checking account. This is your initial investment. If we were double-entry accounting, you’d call this owner’s equity. But we aren’t. This is what you’re going to write all of your fanfiction on. You cough up a whole two thousand dollars on the spot and enter it into your cash ledger.

We can find that by taking the total of all of your income and expenses for the month. Ignoring the initial investment because that doesn’t fit into either category. So we can easily calculate your business’s profit and cash closely.

Multi-Column Approach

If only there was a way to get some more detail. Then this would become valuable to us. And that is where the multi-column approach comes in. The multi-column ledger works in a very similar way to the three-column ledger. The first thing to note is that we now have a reference column.

This is essential for any organized bookkeeping system. In this column, we give each transaction a unique reference number to help us identify it. And if you’re savvy you can save backup documents that support each transaction in your Google Drive with a reference number.

We have grouped the columns into two main categories. Cash in and cash out. This allows us to categorize all of our income and expenses into their distinct columns. This will be a big help when tax time comes around.

One Important Thing To Note

You will need to check the transactions against the ones in your bank statement each month to make sure that none are missing. This is called doing bank records and it’s critical because an incomplete cash ledger isn’t much used to anyone.

This is great if you have minimal transactions as it’s fast and easy to maintain. Very little accounting knowledge is required, so you might be able to get away without having to hire a qualified online accountant or online bookkeeper.

Problems of Cash Accounting

You’ll be exposed to all of the disadvantages of that method.

  • Things like fluctuating profits caused by recognizing related income and expenses in separate accounting periods.
  • You have no idea what your business’s financial position is. This is not ideal if your business buys or sells on account with credit terms because you won’t be tracking your accounts receivable and accounts payable.
  • This single-entry accounting system only recognizes one of these sides so it gives you an incomplete picture of your business’s books.

If That’s The Case Then What’s the Point?

This single-entry accounting method is a great place to start for anyone who runs a small business with few transactions and little to no assets or liabilities. Especially if you don’t have a bookkeeping system in place yet. This technique will help you get your books in order. Many small businesses are using a variation of this right now.

Double-Entry Accounting System

The double-entry accounting system is one of the greatest discoveries of the past 600 years. There are two sides to every financial transaction.  However double-entry accounting is the king of all accounting systems. It’s a much tighter method with built-in checks that leave less space for errors.

It also gives you a complete record of your financial transactions. There’s a reason why all large businesses use double-entry accounting. The good news is that a single entry accounting record can be transferred into a double entry accounting system at any time.

Accounting Software’s

There are a whole bunch of cloud accounting software packages out there that do all of the double entries for you so you don’t even have to think about them. A couple of the biggest names are QuickBooks Online and Xero.