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How Do I Set-Up My First Accounting
System?
Accounting & Financial
Management
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Note:
We always recommend you speak to
an accountant or bookkeeper, especially when initially setting up your
accounting system. This way, they can help you setup your accounting system
properly the first time so you don't make mistakes that will need
to be corrected later in the year when filing taxes or other government
forms.
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Pick an Accounting
Method
The first decision to be made is which type of accounting method to choose, there
are 2 choices:
The Cash Method (or Cash Basis) - this means that you count income
when you actually receive it (either as cash, credit card charges or check) and your expenses are counted when
you actually pay them. This is the most common method for small businesses, especially those that take
immediate payment for a product or service (credit card, check, cash, etc.)
The Accrual Method (or Accrual Basis) - this means that you count
income when a sale is made (regardless if you actually receive the money for it) and expenses are counted when
you actually receive the good or service (instead of paying for it immediately). This method is common for
larger businesses or small businesses that utilize "invoicing" and frequently deliver a product or service
before being paid for it.
Choosing a
Method
You are free to pick either method provided you have less than $5 million in annual
sales OR you maintain inventory (in that case, then you must use the accrual method).
The accrual method is generally considered to give you a more accurate picture of your
company's financial situation but requires you to take extra steps like maintaining accounts receivable and
accounts payable records. The cash method is generally easier to maintain and is the preferred method for small
businesses.
Choose a Method for Recording
Transactions
After you've decided on an accounting method, the next step is to decide how you are
going to record transactions. You have basically 2 choices:
Hand-Recording Transactions - you actually hand-write each transaction in a
ledger.
Software - you enter
transactions in a software program which then automates many routine tasks.
By far the most popular method is software. There are dozens of accounting software
packages and most of them will help you maintain your books as well as automate things like payroll and
reports.
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