Business Ideas

Given that the government requires every business to provide legible financial accounts for their business activities and also that a manager/owner cannot possibly know where his business is or how it is doing without them, it is vital to prepare and maintain decent, traditional financial records according to a recognized system such as the double-entry book-keeping method.

In a typical double-entry book-keeping system, a transaction enters your system in (one of) the journal(s), which are also called the books of original entry. These entries are simply chronological entries of any transaction. Each entry is made up of: 1] the date; 2] the account to be debited or credited; 3] the amount.

One general journal is sufficient for many businesses, but most businesses use two additional journals: one for cash payments and one for cash receipts. Keeping separate journals saves time, saves space and reduces errors, because they have pre-printed headings.

Each entry into your journal must be supported by a source document, which can be a receipt, a ticket, purchase order, cheque or a cheque stub and such like. These source documents are necessary for tax purposes and to deter employee dishonesty.

In order to consolidate these records and make them more meaningful, they then have to be transferred to the ledgers, which are the physical records for each account. The accounts can be housed in one ledger, but it might be easier to spread the accounts over several ledgers. The reason for this is that the ledger can be less bulky and more than one person can work on them at a time.

This transferring of data from the journals to the ledgers is called posting. During this stage data of the same kind is moved to the correct account together. Because the ledgers are the second point of entry into your system, these books are often called books of second entry.

In summary, the journals are an accurate financial record of your business activity but it is virtually unreadable in any meaningful way. By transferring the data to ledgers, it become more legible, but it is still not clear at a glance. This is achieved by creating financial statements from the ledgers.

There are two main financial statements that can be created from the ledger balances: the balance sheet, which is a summary of your business' assets, liabilities and cash at a given moment and the income statement (profit and loss or P&L statement), which is a summary of your business' income and expenses over a given period.

The difference between the two can be likened to the difference between a photograph and a motion film. The balance sheet is a picture of your business at a given moment and the income statement depicts your business as it changes over time. For this reason, balance sheets are often titled 'December 31st 2009' and income statements 'For the year ended December 31st 2009'.