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Entries in bookkeeping (1)

Saturday
Feb232013

Shoe Box Bookkeeping...Can it work?

It is tax time and part of the annual cycle of tax preparation is the resolution to start keeping better records. Usually uttered in embarrassement as one delivers the plastic sack or shoe box of receipts, scribbled napkin notes, tax documents and IRS notices in thick rubber banded bundles of unopened envelopes to a tax preparer.

And if YOU are a business owner you should be embarrased. To quote the father of accounting Luca Pacioli

Ubi non est ordo. ibi est confusion (Where there is no order, there is confusion). 
Poor organization is the cause of most business problems; missed opportunities, uncollectable receivables, lost assets, increased taxes, partner arguments and loss of the business. Every CPA has their share of horror stories resulting from disorganization. Many tax preparers refuse to prepare returns for the shoe box client, other's charge appropriately higher fees and attempt to train the client to keep better records. That goes one of two ways. One the client is rewarded with lower fees or the ex-client will seek a new tax preparer. Annual bookkeeping is useful only to the taxing authority and a money looser and waste of time for the tax preparer.
Business associates who see a shoe box record system know not to trust what the show box owner says. Would you trust a bank that recorded you deposit on a used napkin and dropped it into a bag marked This Year?
I will not waste more time persuading you to organize, you should know now or accept that your business and life will be confusing.
So, how should you keep your records? QuickBooks, Bookkeeper or other accounting software could be used. And unless you know what your doing the ease of use can make a bigger mess. If you have only a few transactions each month the cost and frustration of software is not worth it. 
For ten to twenty transactions a month a spiral bound note book and twelve envelopes works well - if you record the transactions the day they occure. Waiting until the end of the year will defeat the purpose of bookkeeping. Review the day's transactions each day recording the expense or deposit. One transaction to a line; noting the date, the payee, invoice number, the amount and the purpose. Be consistant in purpose. Use a short descriptive for the purpose, Cost of Goods Sold, Insurance, Meals. Reserve the first few lines of each page to record deposits and the lower lines for expenses. Ideally one page will record one month's activity, two pages consistantly shows the need for a little more sophistication. At year end total each month's amounts for like purposes; total Cost of Goods Sold for January thru December and record it on a page after the final month of activity. Do the same for other expenses, one line per expense. If you purchase a computer then just use Computer for the purpose. Same with Furniture. The idea is to create a useable summary, not an itemized list of every transaction.
To determine income or loss just subtract each month's total expenses from deposits.
The result of all this work will be an understanding of where you are really spending your business money and an opportunity to change spending before forced to. Also less stress and embarasment at tax time and a sense of professionalism. You will also be prepared when business takes off to upgrade your accounting to a more appropriate system.