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Finance Learning Lab – Micro Course on Small Business Bookkeeping and Finance (Part 8 of 10)

Let’s talk accounting systems! So this is something that I think has sometimes had entrepreneurs running down this like deep rabbit hole. So if you think of Quickbooks, I’m not anti-Quickbooks, but what I would say is there’s a huge trap that you are going to over-engineer and overcomplicate your life trying to set up an accounting system in a way that is a million times more complicated than what you ultimately need it to be. What I fundamentally need you to remember is that businesses have been around for a number of centuries. Back in the day, it was merchants that would trade with each other and sell different items. Did they have Quickbooks? Did they have laptops? They didn’t have an internet connection. But they still managed to do their full accounting and bookkeeping doing nothing other than a pen and a paper. So we are fortunate that we now have tools that can help us do different things but make sure that your tool, whatever system it is you happen to be using, is not making your life more complicated than it needs to be.

Fundamentally what you’re trying to do with your accounting system is nothing other than gather up everything that happened. So you could gather up everything that happened by inputting it. So remember what you’re trying to do with an accounting system is nothing more than gather up all the transactions that occurred and putting them into one spot. And again back in the merchant days, that would have been pen and paper, jotting down all the different things they were involved in. and then #2 summing up that information. So all that information that you compiled together into one spot, you’re going to categorize it as either saying, “Yep, this was revenue we got in from customers and this was expenses we incurred to run our business”. Or you’re going to say, “You know what, it was something that didn’t fit into one of these two categories but it happened to be something that we purchased, so we would own for the long term”. Or it happens to be money that we owe to someone else, meaning oftentimes called a liability. Or it’s our own money as the owners that we’re injecting into the business. Basically your accounting system is doing these two functions. Function #1 gather it all up into one spot. Function #2 taking all of these different transactions and putting them into one of five buckets. So remember the bucket #1 sales of revenue and bucket #2 is your expenses. And then if it’s neither of these two, which is what we talked about earlier on your income statement, is going to live on the second piece of paper that we call your balance sheet.

So what is your balance sheet? Well, it’s basically a fancy word for asset (what you own), liability (who you owe money back to) or equity which is a fancy way of saying the money that you as the owner injected into this business. So that’s what you need to think of when you’re viewing your accounting system. Don’t let it complicate your life. Don’t turn a tool that is supposed to be making your life better into this disastrous snowball project that you have to figure out. If you’re finding it that complicated, you are allowed to use Excel. I give you a 100% permission, you are allowed to. Your bookkeeper might not like me but that’s okay. If it’s not helping you to use that system you do not have to use it. So that is what your accounting system is fundamentally all about five categories. You always want to think about your accounting system with the perspective of what the end in mind is. What are you going to be using this for? Well, you’re going to be using it for the creation of two pieces of paper: the creation of an income statement or the creation of a balance sheet. The income statement, your tax accountant is going to need, because they’re going to want some of those transactions in a few different buckets so they can fill out those forms for the government. Your balance sheet, so that you as the owner can look at it, and say “Yeah, I’m pretty comfortable with where I’m at”. But fundamentally, it’s to inform you as the owner and to enable you as the owner to provide the information that anyone else needs. And if the only stakeholder that you really have is the government to pay their taxes, keep it simple. If you have additional stakeholders, for example you’ve taken on debt or you’ve taken on an investor, then you’re going to want to make sure that the output that you’re getting from your accounting system is able to meet your needs as the founder of the founding team as well as your particular stakeholders. Don’t make it more complicated than that and never ever let your bookkeeper try to make you feel like it has to be so overwhelming. It doesn’t. It’s basic that’s what it’s all about. In the next section we’re going to talk a little bit about the chart of accounts.

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