Starting a business involves planning, making key financial decisions, and completing a series of legal activities.
However, the most undervalued yet most critical of all is good record-keeping. This should not be confused with accounting. Bookkeeping is the daily recording of sales, expenses, cash and bank transactions of the business in a general ledger.
Accounting on the other hand is the practice of analyzing the information in the ledgers and developing insights into your business’s financial decisions. So what is the day to day paperwork involved in running a small business? Riaz Gilani, Director at Gilani Gourmet Limited offers his business insights on bookkeeping built over 15 years of running a business in Kenya.
The first step in establishing a record keeping system is setting up a separate checking account for the business. The deposits into this account should include any initial investment you make to start your business, the proceeds from any startup loans or investments, and all revenue from customers.
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Cash sale book
The cash book is the central record of all the money that comes into and goes out of your business, often referred to as cashflow.
A cash sale document specifies goods sold, quantity, price and total.
“It is also an acknowledgement of sale where cash, MPESA, credit card or current cheque is paid for immediate settlement. Cross reference with Electronic Tax Register (ETR) number if applicable,” says Gilani.
All transactions in the cash book have two sides: debit and credit. All cash receipts are recorded on the left-hand side as a debit, and all cash payments are recorded by date on the right-hand side as a credit.
“Similar to cash sale, but this is for goods sold on credit. The customer will have to have an account with you for this to apply. Total every month and send a statement of account to your customer,” says Gilani.
Invoicing is crucial for small businesses, because invoices are the business documents that enable companies to get paid for their services.
Preparing invoices and sending them to clients is your responsibility but it may get out of hand. Get it in control by managing the accounts receivable ledger will be useful for chasing late payments.
Delivery note book
“This is important for acknowledgement of delivery of items, whether or not they are sold. For example documents, samples, equipment, etc.” says Gilani.
This ensures clients don’t claim to not receive a product that you delivered. The duplicate copy of an invoice serves the same purpose as a delivery note.
“A delivery note is often appended with the words: ‘Please receive the following in good order and condition. And a space for the recipient’s details. Name, ID number, signature, and company rubber stamp.”
This is not the same as a cash sale. A receipt book is a small book with multiple copies of receipts where one copy is given to your customer or client as a proof their payment and the other one is stored as company records.
“It is an acknowledgement of payment for goods and services supplied on credit via invoice. An invoice debits a customer’s account. A receipt credits a customer’s account. It will appear on the monthly statement of account,” says Gilani.
For example, point of sale purchases, such as buying baby clothes at a store, have complete seller’s contact information but limited buyer’s information. A receipt is the buyer’s proof of payment.
Petty cash voucher book
A petty cash voucher is a form used as a receipt whenever cash is withdrawn from a petty cash box.
“It is a document that records disbursement of funds for small purchases or expenses where the use of cheques is not possible or not practical. The voucher specifies details of the recipient, items bought, total, and signature,” adds Gilani.
At the beginning of an accounting period, there should be a certain amount of cash in the box and no vouchers (which should have been removed as part of the month-end entry for the preceding month). Then, as cash is disbursed from the petty cash box, the vouchers are essentially swapped for cash. Thus, at the end of the month, the total amount in the petty cash box should still equal the balance at the beginning of the month, except that now the total is comprised of both cash and vouchers.
Daily ledger/cash journal
This is where those free diaries come in handy. The phrase “keeping the books” refers to maintaining a general or daily ledger.
“Every day, you need to specify total sales, both cash and credit, and ensure it tallies with Electronic Tax Register (ETR) totals. The general ledger is built by transferring the journal entries of a company’s financial transactions. All purchases and expenses as per cheques issued and petty cash vouchers as well as opening and closing cash balances are transferred here.”
It’s the primary tool that allows you to keep track of all transactions and sort them into subcategories to make it easier for you and your accountant to find a record of your finances in one place.
“The general ledger is a collection of accounts that display the changes made to each account based on past transactions, along with the current balances in each account. It is also known as the Books of Final Entry,” says Gilani.