Accounting records are the records of a firm's financial transactions and current financial position. Accounting records are necessary for tax purposes, legal accountability and adequate financial oversight.
Two Approaches to Keeping Accounting Records
The first thing to know is that accounting records come in two flavors: single-entry and double-entry. Each has its advantages; single-entry bookkeeping is simpler, as you might expect, and may be the appropriate system for a small business owner. Double-entry bookkeeping -- again, no surprise -- provides two journal entries for every transaction, a debit entry, and a credit entry. This is more complicated, but because these two entries must finally balance (hence:"balancing the books"), it gives you a way of catching errors and also makes frauds easier to catch.
Double-entry bookkeeping is the usual standard.
The Basic Accounting Documents and How They Flow Forward
- The transaction initiates every accounting procedure. You buy something, sell something --whatever. The idea is to make a record of every financial transaction. Where you'll record the transaction is in
- The journals. This is the ground-zero of accounting. Every subsequent accounting procedure goes back to a journal, which is the record of each financial transaction as it occurs. You may have separate journals for sales and cash receipts and another journal for disbursements or just one journal that includes all transaction types. Either approach is okay, but the important things to remember are record every entry and keep the journal(s) up to date. Eventually, you'll group all these entries, using
- The general ledger. This is where you'll transfer or "post," each of the journal entries into its appropriate place in the general ledger by transaction type. This makes it faster to look up individual transactions and also provides a basis at some point -- often at the end of the month or the quarter -- for preparing...
- The trial balance. Here's where you'll sum up all your debit entries (we're assuming you've gone the double entry route) and all your credit entries. They should match. If they don't, you'll have to go all the way back to your transaction records in your journal and work forward to see where the error occurred. Once everything balances, you can prepare...
- The financial statement. At this point, your hard work pays off. You now have a document that lenders, government agencies -- any entity that wants to know who you are financially before doing business with you -- will accept.
This is the briefest outline of the accounting process, from its beginnings in transactions to the production of the financial statement. You'll need to know more before beginning your own accounting system, but you now know where you're headed.
Learning More About Accounting Records and the Basics of Accounting
If you're doing this yourself, and particularly if you decide on the more ambitious double-entry method, invest in a basic book or two on the subject. "The Accounting Game: Basic Accounting Fresh from the Lemonade Stand," for instance makes the learning process a little less tedious by basing the instruction on the running of a lemonade stand. It's available on Amazon.
Another approach is to begin with a system like Quickbooks, which provides a clear and popular method of doing double-entry accounting along with clear instructions on how to use the Quickbooks accounting system.