Accounting software is used by accountants to enter many
complex financial transactions into the financial books of
account and is almost invariably based upon double entry
bookkeeping principles. A major advantage to those
companies and the finance staff is the extent to which
financial information contained in the database can be
queried for financial control purposes.
An accountant needs to not only ensure the financial
records are accurate but also retrieve any part of the
accounting records to answer accounting questions on the
accounts, provide a legal basis for the transactions and
report the financial statements at regular periodic
intervals.
The small business has different accounting needs which are
better described as bookkeeping than accounting. For non
limited companies that do not need to produce a balance
sheet then a simple income and expenditure account can be
produced much simpler using single entry bookkeeping
principles.
Less financial control is often required from small
business accounting software as the bookkeeper is often the
owner manager who already has an intimate knowledge of each
transaction. Books are still required for tax purposes and
a solid requirement of preparing a set of financial books
for tax purposes is that each entry is supported by third
party evidence.
Examples of third party evidence would be sales invoices,
purchases invoices and bank statements. Financial
transactions where no receipt exists can still be entered
in the business books although all transactions not
carrying third party evidence could subsequently be
disallowed for tax purposes and certainly would be if the
amounts entered indicated unusual income or expenditure.
Producing an income and expenditure statement using single
entry bookkeeping is little more than making two lists of
financial transactions. Those lists being one of sales
income received from sales invoices or receipts issued to
customers and the other of purchase expenditure being from
purchase invoices received from suppliers.
To record sales income it would not normally be sufficient
to simply add up the total of the invoices as such a
summation does not leave an audit trail of the items which
have been included. A written list of sales invoices does
provide an audit trail.
Sales accounting for a small business accounting purposes
can be either a manual list of the sales invoices or by
using a spreadsheet package a list can be made on a
bookkeeping spreadsheet. Using a spreadsheet for the
bookkeeping has advantages as simple formula can be used to
add up the column totals.
The essential information to enter for a sales invoice
would be the date of the sale, name of the customer, sales
invoice number if applicable and optional a brief
description of the item sold. In the next column would be
the total sales invoice amount. If items like value added
tax are required to be accounted for then an additional
column would be required to accommodate the vat or sales
tax accounting.
A further small complication might be if at the discretion
of the small business owner additional information was
required from the bookkeeping records to indicate the
totals of the different types of products and services then
additional columns could be incorporated to enter the net
sales figures in these columns.
There it is then, a simple list of sales invoices to
satisfy the sales accounting requirements for a small
business where a balance sheet is not required.
On the expenditure side of the business the bookkeeping can
also be a simple list of the purchase invoices and receipts
showing the amount spent. The list should also produce an
audit trail by showing the date of the purchase invoice,
name of the supplier, purchase invoice for identification
purposes and the total amount spent.
Usually tax returns are the main purpose of producing small
business accounts and invariably some analysis is required
to show what the expenses have been spent on. That is not
difficult to achieve and as with the sales accounting the
owner manager can add additional standard columns to the
bookkeeping spreadsheet.
The expenditure analysis columns do not need to be a
different column for each type of expenditure. It is better
to set up and group the analysis columns in general
headings which can accommodate all the expenses.
Such columns may include stock, other direct costs,
premises costs, general administrative costs, transport and
delivery costs, repairs and maintenance, travelling and
hotel costs, motor costs, bank and legal costs and other
expenses. It is better not to enter too many items under a
general heading of other expenses as this is more likely to
be investigated as the type of expense has not been
precisely identified.
One important column to also include is for asset purchases
as fixed assets usually have different tax rules applying
to the claim of the expense against tax and should be
separated from other expenditure.
Having set up two bookkeeping spreadsheets the task is then
to produce the income and expenditure account by collecting
the totals of each of the analysis columns. The sales total
is the sales turnover from which is deducted the totals of
each of the expenditure classification totals with the
result being the net profit and loss of the business.
Where stock is bought and sold a further adjustment may be
required to account for the difference between opening and
closing stock. This is done by taking a physical stock
check and valuing the stock at the start and end of the
financial period.
On the income and expenditure account adjust the stock
purchases figure by adding the value of the opening stock
and deducting the value of the closing stock. The result is
not the stock purchases total as shown in the bookkeeping
spreadsheets but the cost of the goods which have been sold
to produce the sales turnover being reported.
Simple bookkeeping for a small business accounting purposes
can be two lists of sales and purchases supported with
sales invoices and purchases invoices.
----------------------------------------------------
Terry Cartwright, an accountant at DIY Accounting designs
UK Accounting Software spreadsheets for companies at
http://www.diyaccounting.co.uk/companyaccounts.htm and self
employed bookkeeping software
http://www.diyaccounting.co.uk/bookkeeping.htm
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