On the other hand, the single-entry method of accounting presents a distorted view of business results. This accounting method records one entry to one account for each transaction. Posting activity to your checkbook is a single-entry accounting system. When you write a check, you post one transaction that reflects a decrease in your bank balance.
Business owners should not use the single-entry option because they can’t generate the account activity required to create balance sheets or cash flow statements. If you’re managing your business with the single-entry method, a CPA can help you move to the double-entry method.
3. Choose your accounting method: accrual or cash basis
Business owners should use the accrual basis of accounting so that their financial statements are clear and accurate. The accrual method matches revenue earned with expenses incurred to generate the revenue, which presents a clear picture of company profit.
Let’s look at an example:
– Riverside Landscaping bought $1,000 of sod in February
– Riverside Landscaping paid $2,000 in labor costs in March, and billed the Jones family $3,500 on March 20
– The Joneses paid Riverside’s invoice in April
Assuming Riverside paid $100 in overhead, you can subtract revenue and material, labor, and overhead costs to calculate their profit from the Joneses’ project. Riverside’s profit is $400.
The material, labor, and overhead costs and revenue from the landscaping job posted when Riverside performed the work. Riverside’s $400 profit posted when they billed the Joneses on March 20. When you can match revenue with expenses, you’ll know the profitability of each product or service.
On the other hand, the cash method posts revenue and expenses based on cash inflows and outflows. Using the cash method, Riverside would post $1,000 in sod expenses when they pay cash in February. Their $3,500 revenue would post when they receive cash from the customer in April.
Essentially, revenue and expense transactions would post to different months. So Riverside couldn’t look at the March income statement andsee the Joneses project’s revenue and expenses. Therefore, they couldn’t determine the profit earned on that job.
4. Categorize your transactions
As you post transactions, you need to post the information to the correct accounts in your bookkeeping system consistently. Maintain an updated chart of accounts to post your accounting information to the right places.
Every business creates a chart of accounts—or a list of each account needed to manage the business and a corresponding account number. As the company grows, you may add, remove, or change the accounts you use to post transactions. For example, in Riverside’s journal entry, their cash account is #1000, and their sod account is #3000. Balance sheet accounts are numbered first, followed by revenue and expense accounts.