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.
Cash- and Accrual-Based Accounting
If you are using a cash-based accounting method, you record a sale when you receive payment. In this case, you only need to keep two journals (disbursements and receipts) and a ledger at the end of the month. There are two terms you will learn soon enough as a business owner: accounts receivable and accounts payable. Accounts receivable means that you have sold a product or service and have not collected the payment yet. Accounts payable is when your business has purchased a product and service and you owe money to the supplier.
Accrual-based accounting is useful when affording credit to a client or maintaining a large inventory. In this case, you would enter the expense of the item when it is incurred, regardless of when you make the actual payment. When you make sales on credit, you would enter them into your books as sales and record them on your accounts receivable log. After you receive payment, you adjust your accounts receivable and enter the transaction in your cash receipt journal. When you use credit to purchase inventory, you would make an entry in your accounts payable. You would enter the transaction on your cash disbursement journal when you
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