When any business begins the process of bookkeeping it is important to understand how to establish the records as well as what the different types of accounts mean. A balance sheet is laid out to track several different accounts and includes: assets, liabilities, owner’s equity, income, and expenses. Two accounts that typically cause a bit of confusion are the assets accounts and the income accounts. In order to help you understand how the two differ, it is first important to understand the definition of each.
There are two main systems used by businesses when discussing bookkeeping: single entry and double entry. While both systems are quite adequate, choosing which one to use in your business is for the most part, up to personal preference. That being said, unless your business is small, and only handles simple transactions, double entry bookkeeping will provide the most benefit.
Single entry bookkeeping is much like a register on your statement, where only single transactions are recorded in the form of a cash debit or credit. Keeping the books in this manner is less time consuming, and less expensive. However, single entry bookkeeping only makes a record of cash, accounts receivable, accounts payable, and taxes. More in depth transactions are not recorded, which could lead to only a partial accounting of your finances.
Double entry bookkeeping makes use of generally accepted accounting principles (GAAP), and is a bit more involved. Rather than having just one transaction in a column, there are two entries. A credit entry is made for all income, and a debit entry is made for each expense. These two entries will offset each other so that both sides tally to zero.
Double entry bookkeeping therefore provides the following advantages over single entry bookkeeping:
- It provides verification that errors have not been made, including a check that there has been no theft, when all transactions are properly recorded.
- Financial statements can be prepared easily because of the accurate calculations that figure profits and losses, When both entries are made, the company can easily pinpoint areas where money is owed, or who owes the company money.
- The company can easily view their financial standing, and can more simply prepare for the future.
- There are more required entries, double entry bookkeeping creates detailed records of all assets within the company, so that income is never overlooked.
- Double entry bookkeeping also tracks internal transactions, which helps to provide more detailed information for reporting at the end of the fiscal period.
There is never the problem of omitting data that is important because every transaction is logged twice, in separate areas. As you can see, there are a number of key benefits to utilising the double entry bookkeeping system. Just about every type of business in every industry can make use of this method, and yield exceptional results.
*Article originally posted in our old bookkeeping blog.
In Australia, you have a choice to remain on a cash basis for lodging your BAS while your Turnover remains under the $2M threshold. The advantages of this are if you have outstanding debtors you do not have to pay GST on those sales until the cash is actually received. The problem is that cash reports are meaningless if you are trying to monitor the performance of your company. If you incurred wages to provide a service in period 1 then you want the revenue to appear in that period, not in the period the money was actually received. This is called the Matching Principal in Accounting. Luckily, bookkeeping software such as Xero, MYOB and Quickbooks allow you to remain on Cash for your BAS reporting while running Accrual based reporting for your Management Reports.
The Hybrid basis of Management Reporting allows you to capture all of your costs and revenue in the same period to get a true measure of how you are performing each month. You just need to be sure that all of your Suppliers Invoices and Sales Invoices are entered in the month that the transaction took place and be sure to run all of your Management Reports on an Accrual basis while leaving our GST Reports on a Cash basis.
3rd Party Add-ons
In specialist industries such as Legal, Property or Healthcare, there are many 3rd Party Add-ons integrate with your Accounting Software to provide you with Industry Specific requirements that your standard Software can’t provide. While most of these applications claim to have a “seamless Integration” with your bookkeeping software, you will find that the integration is actually driven by exporting General Journals. The problem with this is that many of these products are unable to differentiate between Cash or Accrual on a General Journal which makes it very difficult to produce both Cash and Accrual Reports on a Hybrid basis.
If we weren’t dealing with Legal Firms and more specifically Legal Trust Accounts there would be no need for “Anticipated Payments.” Legal Firms often receive money in advance into their General Trust Account which can be used for either direct payment of costs relating to the matter (eg.Barristers Fees) or for payment of the Legal Firms Invoices relating to that matter (providing they have a signed Cost Agreement in place and that they have given the client 7 days notice of their intention to withdraw fund from the clients trust account to pay their invoice ie. a Trust to Office Transfer).
The Regulations governing Legal Trust Accounts require that the Law Firm must have actually “Paid” any 3rd Party Disbursements before they are allowed to do a Trust to Office Transfer (TTOT). The reason for this is that some firms were writing cheques for the disbursements then putting them in a drawer for a couple of months but they were withdrawing the clients funds to pay their own invoice via a TTOT.
Therefore “Anticipated Payments” name for “Account Payable” that are specifically relating to Client Disbursements.
Although LEAP Cloud allows you to monitor these accurately within the Matter in LEAP, the accrual does not flow through to wither Xero or MYOB with the Office Account Integration. Therefore if the Law Firm is reporting on an accrual or hybrid basis you would need to manually enter this adjustment at the end of the month to account for it in both your BAS and Management Accounts.
Occasionally, when we do an audit on the accounts of new clients we find that the previous bookkeeper has been keeping the accounts on a cash basis. This means that they are entering revenue and expenses when they are paid, not when they were incurred.
With modern accounting software such as MYOB and Quickbooks, there is no excuse to keep accounts on a cash basis and it usually reflects laziness on behalf of the previous bookkeeper.
Accrual accounting is based on the matching principle. That means that for any given period, you need to match the revenues with the expenses incurred for the period to enable you to use those accounts as a true measure of performance. A simple example of this is where a salesman may have an extremely successful month resulting in a large increase in sales for the month which earns him a bonus. The bonus may not be paid until the next month, however in measuring the increased profitability for the month you would want the bonus to be deducted from the increased revenue. An accrual accounting system will allow you to expense the bonus in the month it was incurred, even if it is paid later on down the track.
Some business owners confuse the cash v accrual basis for their management accounts with what basis they are registered for their BAS. If you are registered to report your BAS on a cash basis, you can still run a cash BAS out of MYOB or Quicken if you are keeping management accounts on an accrual basis.