Two basic types of bookkeeping and accounting practices exist: the cash method and accrual method. The cash method works well for very small business owners keeping track of personal income; in this method transactions are recorded only when cash flows in and out. The accrual method, however, gives a clearer financial picture of a business and is more common in larger companies and corporations. In the accrual method, transactions are recorded when sales occur and goods are bought regardless of whether cash is involved. Both of these methods use sales journals, general ledgers and other important financial documents to keep track of the business' value.
Ledgers and Journals
Create a general journal and a general ledger to record the sales and cash transactions that occur. The general journal lists all sales, receivables and cash transactions that occur at the moment they occur; transactions are posted in chronological order. The general ledger contains separate sections for each account that is used in the general journal. It contains a list of all the named accounts within the broad headings such as cash, expenses, and supplies. Create the ledger using "T-accounts" instead of a long list of transactions accounts as in the journal. Post a debit and a credit for each transaction in the journal followed by the same transaction to each T-account in the ledger. Make sure that at all times the debits and the credits are equal.
Prepare a trial balance before you start making a balance sheet. The trial balance essentially closes out your financial books and alerts you to any trouble or miscalculations made. Take the total debits and credits from your general ledger accounts. Post these to your trial balance worksheet. Post any adjusting entries that need to be made to ledger accounts such as adjustments for employee wages, property taxes, prepaid insurance, and bad debt expenses. Post closing entries to close out revenues, expenses, and transfer your income summary to a capital account. Confirm that the debit side equals the credit side on the trial balance.
Prepare a balance sheet on a monthly basis to get a snapshot of your business' financial portfolio and keep track of its history. Set up the balance sheet to include all of your asset accounts such as "cash," "inventory" and "accounts receivable" on the left side; place your liability and capital accounts on the right side of the balance sheet. Total each side of the balance sheet making sure to add the liability and capital accounts. Remember the accounting equation that "assets equals liabilities plus owner's equity." Confirm that each side of your balance sheet is equal to each other.