Ask SCORE: Here are the basics to business bookkeeping

COURTESY TO THE BELLINGHAM HERALDOctober 15, 2012 

Question: I took a basic accounting class some years back. But I think I need a tune-up about bookkeeping and accounting for my new business. Also, what outside professional services are available, and how will I know when I need them?

Answer: Well, those are good questions for any young business to know about. Let's jump right in and talk about this.

Today's column gives you a grab-bag of things to know about small business bookkeeping and accounting. We'll look at the increasing role accounting plays in your business as you grow. But relax - no stuffy terms like "amortization" or "retained earnings" today.

Of course, you know that your business has to keep records of your financial activity. For starters, these must be sufficient to provide a basis for accurate reporting on your income tax return. But it's even more valuable to you, if you have correct and reliable information about how your business is doing. This allows you to compare your actual performance to your business plan, and make decisions about how to run your business. If you don't have a written business plan, call for a free and confidential SCORE appointment and get help with this important matter.

A very small business can get away with "checkbook accounting." This is where all revenues are deposited into the business account, and all expenses are paid out of that same account. Don't be stingy with space in the check register - be sure that you enter ample information for each check entry about the payee and the purpose of the expense. At year-end you may not remember why you wrote that check to the Fred Carlson Company, unless you noted that it was for office supplies.

If you're new to business, go to the IRS website, irs.gov, click on the "Forms and Pubs" tab and download a Schedule C. This is the form you will need to fill out and include with your next personal income tax return. It shows you the different categories of expenses that you will need to use.

While you're there, the IRS has a very well-written pamphlet on this exact topic. It's Publication 583, "Starting a Business and Keeping Records." At the IRS website enter "583" in the search box and scroll down a bit for the PDF version. You can also get a hard copy at the Bellingham IRS office, 114 W. Magnolia.

More-established businesses may benefit from using some accounting software to keep things organized. Accounting packages are helpful and user-friendly. Forget the old stuff about debits and credits. There are some free programs that are pretty good; if this interests you go to ilovefreesoftware.com and enter "accounting" in the search box.

Typically the step above that is QuickBooks, the defacto standard for small business accounting. It's available in several versions. There are excellent training videos on YouTube.

As most companies grow, they need some outside help with the books. This may be a simple monthly summary of sales and expenses. But as soon as you hire employees, the game changes. Unless you have idle time and the inclination, you're better off using an outside service to process the payroll and prepare the required quarterly reports.

Some businesses grow and need in-house staff. This might be a part- or full-time bookkeeper to post transactions, write checks and handle other functions. A full-charge bookkeeper has additional duties, perhaps preparing monthly or quarterly financial statements. A business at this stage will typically use an outside accountant to do the year-end books. If you're a corporation or LLC, there will also be a separate income tax return to prepare.

Next up the scale is to bring the accounting function in-house. A business can then prepare budgets; do financial analyses; and make decisions about things like pricing and cash flow planning.

Let's do a quick review of some common accounting credentials.

• A Registered Tax Return Preparer (RTRP), a recent designation, is one who is IRS-qualified to prepare tax returns for compensation.

• A Certified Public Accountant (CPA) is licensed by the state to perform accounting work, including audits. This is a high-level credential. There are around 14,000 CPAs in Washington.

• A Certified Management Accountant (CMA) focuses on the internal operations of the business.

• Other, less-common credentials: Enrolled Agent (EA); Certified Fraud Examiner (CFE); Certified Internal Auditor (CIA).

Last thought: it's best to work with a professional who is familiar with your type of business. Ask other businesspeople to recommend an accountant they use.

ABOUT SCORE

To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.

Ask SCORE is prepared for The Bellingham Herald by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to newsroom@bellinghamherald.com.

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