Maintaining proper bookkeeping record for your business has lots of benefit. To help you get started, this article provides a general guide in establishing bookkeeping process for your business.
Below are the bookkeeping starter guidelines:
Identify the nature of your business
To know the nature of your business, ask yourself this question, “what are you selling”?
- Are you selling service; such as professional, freelancers, self-employed, restaurants, salons, etc.?
- Are you selling merchandise; such as buy and sell of goods, retailers, traders, wholesalers, etc.?
- Are you selling your own manufactured product?
Knowing the nature of your business has an impact on how you will bookkeep it.
For example: In general, a service business only has the following books: general journal, general ledger, cash receipt journal and cash disbursement journal.
On the other hand, merchandising business have the following books: general journal, general ledger, cash receipt journal, cash disbursement journal, sales journal and purchase journal. Merchandising business has more books than service business due to inventory.
Another example: In general, service business uses official receipt. On the other hand, merchandising business uses sales invoice.
Know the business formation and registration
Businesses are registered either as sole proprietor, partnership or corporation.
- Sole proprietorship – one individual owner of the business.
- Partnership – two or more owners of the business called partners
- Corporation – the business has at least 5 incorporators.
Business formation impacts bookkeeping of business equity. For instance, sole proprietor can add and withdraw capital anytime without reportorial requirements. On the other hand, in partnership and corporation, you have to inform SEC for any changes in equity.
Another reason in knowing the business formation is to properly bookkeep profit or income. In the books of a sole proprietor, income or profit goes to capital. On the other hand, I’m the books of a corporation, income or profit goes to retained earnings.
List down your frequent business activities
In bookkeeping, we record the business transactions with money value. These transactions come from day to day business activities needed to run and operate the business; such as sales, expenses, purchase of asset, payment of liabilities, capital investment, purchase of inventory, etc.
Example of business activity:
- when you buy goods for sale, that transaction is referred to inventory purchase.
- when you put money into the business as investment, it’s referred to as capital.
- when you pay your employees, it’s called salary expense.
Listing down your business activities and transactions can help to standardize your business bookkeeping process. When there’s standard in place, it will be easier to implement.
Create your business chart of account
Based on the list of business transactions you’ve identified in item 3; you will be able to create your business chart of account.
For example, let’s create chart of account, of a service business sole proprietor lawyer, with the following business activities:
- Cash from sales
- Cash from the lawyer
- Payment of rent
- Purchase of supplies
- Deposits and withdrawals to bank
- Payment of utilities
- Payment of employee
- Purchase of laptop using credit card
Once you have listed down the business activities, assign an account title.
See sample below:
Transaction | Account title |
Cash sales | Revenue |
Cash from lawyer | Capital and cash |
Payment of rent | Rent expense and cash |
Purchase of supplies | Supplies expense and cash |
Deposits and withdrawals to bank | Cash |
Payment of utilities | Utilities expense and cash |
Payment of employee | Salary Expense and cash |
Purchase of laptop using credit card | Equipment and Accounts payable |
Summary list of account title is called chart of account. Chart of account is normally divided into 5 accounting elements: assets, liabilities, equity, revenue, and expense.
Using the transactions of the sole proprietor service business of the lawyer, below is a sample chart of account:
ABC COMPANY CHART OF ACCOUNTS |
ASSETS 1.1 Cash 1.2 Equipment |
LIABILITIES 2.1 Accounts Payable |
EQUITY 3.1 Capital 3.2 Profit and Loss Summary |
REVENUE 4.1 Sales |
EXPENSES 5.1 Rent Expenses 5.2 Supplies Expenses 5.3 Utilities Expenses 5.4 Salary Expenses |
Once you have established chart of account, it is easier to do bookkeeping of your transactions.
Register your books of account and receipts and/or invoices
In the Philippines, for proper bookkeeping, ensure that your sales documents and books of account are registered with the Bureau of Internal Revenue (BIR)
At a minimum, register the following:
- General journal
- General ledger
- Official receipt or sales invoice
In addition, you register the following, if needed in your business:
- Billing invoice
- Collection receipt
- Cash receipt journal
- Cash disbursement journal
- Purchase journal
- Sales journal
Establish disbursement vouching system
If you want to organize and keep track of your expenses and payments, it is best to create a vouching system for your business. Sample disbursement vouching system are the following:
- Petty cash voucher – used to track and organize daily petty expenses
- Cash voucher – used to track and organize payments using cash
- Check voucher – used to track and organize payments using checks
Keep transaction documents as evidence
In bookkeeping, evidence to support each recorded transaction is necessary. Sample evidence includes official receipt, sales invoice, voucher, statement, contract, etc. The evidence should be properly registered with the BIR, and clearly show your company details: such as name/ address/ TIN/ details of transaction / amount / etc.
Maintain organize filing system
Based on our Philippine tax law, evidence should be kept in the business office for at least 10 years.
To ensure compliance to this tax law, it is best to keep an organized filing system as follows:
- Contracts
- Bank Statements
- Sales documents
- Vouchers and expense documents
- Book of accounts
- Registration documents
- Government reports
Establish and implement strict bookkeeping schedule
Proper bookkeeping process can be obtained with schedule and discipline.
Sample schedule includes daily, weekly, semi monthly or monthly. Depending on the volume of your business transactions and availability of manpower for bookkeeping, the recommended schedule for bookkeeping is daily.
Periodic review of bookkeeping process
Last but not the least, to ensure proper bookkeeping process, have a periodic review. It can be internal or external. This is to ensure all transactions are completely recorded and are accurate. Review helps in avoiding filing of incorrect reports that results to penalties and/or unnecessary audit and investigation.
I hope you have learned something from our bookkeeping starter guide. If you have questions or clarifications or additional input, feel free to leave a comment below.