Small Business Accounting:
How to Setup and Use Accounts

You’ve determined which accounts you need for your business.  Now, how do you setup all this information, and bring the account totals up to current status?

Well, if you’re going to do this the old fashioned way and actually setup ledger books, all you really need is current book value information for equipment, cash account totals, and the monthly receipts not already provided to your accountant ( I am assuming at this point that an accountant has been previously providing this service).  A copy of last year’s tax return will be necessary to establish previous depreciation totals and the method used to calculate deprecation.  Accumulated depreciation will have to be manually calculated.  Now, I would recommend that, if you are determined to do your own bookkeeping, you invest in a computer and some accounting software.

Setting up accounts, and entering accurate information can be time consuming. This can also be a daunting task, even for the computer literate person.  Most accounting software on the market today, provide user friendly question and answer screens to help you determine what type of account you’re setting up, the opening balances, and to what tax line it is tied.  Once you’ve setup a few accounts, you should be able to move through the rest rather quickly.

You will have to be knowledgeable about the type of account you are setting up.  Asset accounts are divided into cash, accounts receivable, current asset, or fixed assets.  When you set the account type on the computer, the software program will automatically set restrictions for what you can and cannot enter into the account.  This is done to prevent careless, but costly errors.  The same principles will apply when moving into liability, equity, income and expense categories.  Setting up accounts, whether computerized or manual ledgers, you must know what type of accounts you’re working with, and how to label them.

I want to bring out some of the more overlooked accounts, that should always be included, but because they aren’t obvious and easy to categorize, business owners often fail to include them.  The accounts include prepaid expenses, depreciation, inventory, and bad debts.  These accounts are often overlooked because as business owners we are most concerned with the accounts that affect our daily information.  The accounts listed above do not directly affect the daily operation of a business, and therefore often aren’t included in account setup.  However, these four categories directly affect the bottom line at the end of the month or year.

Bad debts especially should be tracked and recorded for inclusion in year end tax computation.  Inventory can become quite a large figure in the financial worth of a business.  This is especially true if your business is manufacturing or retail sales.  Both of these industries generally maintain large quantities of inventory, this equates to large quantities of equity, or retained earnings at the end of the month or year.

Depreciation erodes your stated net worth if your equipment is overstated in value, and depreciation hasn’t been transferred to the accumulated depreciation account.  The book value you show for your equipment is incorrect if it hasn’t been tracked and updated for the last two or three years.

Without the inclusion of the correct and necessary accounts when you setup your account information, you cannot obtain financial reports that give you an accurate picture of the state of your business.

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