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Records a small business keeps
Chapter 7 of 9 · explanatory only · no rates, thresholds or deadlines
Cash basis and accrual, the everyday books, and a month-end procedure.
A small business rarely fails because its bookkeeping was elegant or inelegant. It gets into trouble because nobody knew, until too late, what was owed and what was owing. The purpose of the routine in this chapter is to make that knowledge routine rather than occasional.
7.1Cash basis and accrual basis
The two approaches answer the same question differently: when does something count?
| Question | Cash basis | Accrual basis |
|---|---|---|
| A sale counts when | The customer pays | The work is done or the goods are delivered |
| A cost counts when | The supplier is paid | The cost is incurred |
| Shows what is owed to you | No | Yes |
| Effort | Low | Higher |
| Best at | Tracking cash survival | Measuring performance in a period |
The cash basis is simpler and mirrors the bank account, which is why very small businesses start there. Its weakness is that it reports a good month when customers happen to pay and a bad one when they do not, even if the underlying trade was identical. The accrual basis reports performance more honestly and can show a healthy profit alongside an empty bank account, which is exactly the situation that ends businesses. Whichever is used, understanding the other is what stops either being misread.
7.2The everyday books
- Cash and bank book. Every receipt and payment, in date order, reconciled to the statement.
- Sales day book and ledger. What was invoiced, to whom, and what remains unpaid.
- Purchase day book and ledger. The same for suppliers.
- Fixed asset register. What was bought, when, what it cost, and how much of that cost has been charged so far.
- Payroll records, where there are employees, kept separately because they carry personal data.
- Stock records, where goods are held, if only counted at period ends.
The medium matters far less than the discipline. A consistent spreadsheet beats an abandoned ledger package. What a spreadsheet does not give you is the automatic check that double entry provides, so it needs a manual equivalent: the reconciliation in the procedure below.
7.3Keeping business and personal apart
The single change that most reduces bookkeeping effort is a separate business account with nothing personal running through it. Mixed accounts force a reconstruction exercise later, from memory, over hundreds of small transactions, and reconstruction is where errors and unsupportable claims arise. Where an asset genuinely has both uses, record the basis of the split at the time rather than inventing one at the year end.
7.4Month-end procedure
An hour a month, done in the same order every time, replaces a week of archaeology at the year end.
- Gather the source documents. Every sales invoice issued, every purchase invoice and receipt received, every bank and card statement for the period, and any note of cash paid or taken.
- Enter sales. Record each sale once, with its date, its customer, its net amount and any tax charged separately, so the tax is never buried inside the sales figure.
- Enter purchases and expenses. Same discipline in reverse, with a category for each line, and a note where an item is partly business and partly personal.
- Reconcile the bank. Tick each entry in the books against the statement. Anything left over is either a missing entry, a duplicate, a timing difference or an error, and it is worth knowing which.
- Chase the gaps. Any payment on the statement with no document behind it is a question, not a rounding item. Resolve it while anyone still remembers what it was.
- Age the debts. List who owes money and for how long, and list what is owed to suppliers on the same basis, so the two sides can be compared.
- Post the adjustments. Depreciation, prepayments, accruals and anything paid for one period out of another belong to the period they relate to, not the period the money moved.
- Take a trial balance and read it. If the totals do not agree, something is genuinely wrong. If they do agree, they still might be, so compare each line with the previous month and ask about anything that has moved sharply.
7.5Adjustments in plain terms
- Accrual. A cost that belongs to this period but has not been billed yet. Bring it in.
- Prepayment. Something paid now that covers a later period. Hold it back.
- Depreciation. Spreading the cost of a long-lived asset across the years that use it, so a single year is not distorted by a purchase that serves several.
- Bad debt. An amount owed that is not going to arrive. Recognising it is not pessimism; leaving it in overstates both profit and assets.
- Stock. Materials bought but not yet used belong on the balance sheet, not in this period's costs.