Step 2 — Fit your business records
Calculating and entering the bank balances, accounts receivable, and accounts payable constitute the majority of the work for most businesses. Setting up these accounts depends upon your situation – how old is your business, how you have kept your records.
Setting up a new business
It's easiest to set up an Accounting System for a new business. New businesses begin with zero balances in all financial accounts. For a new business, the start date is the date of the first transaction, which is usually a deposit made to open a new bank account. Accounts may be created on the fly, as the need for them arises.
Converting from an existing system
If you have an Existing Business, and are converting from a manual system, your existing accounting system is a good source for beginning balances. With an existing business, you need to decide what date should be used to enter beginning balances and begin recording transactions.
Choose a date, usually month-end, and enter the balances from your old system as beginning balances in Small Business Accounting. If you choose a recent date, you can reduce the volume of transactions to be entered between the start date and the current date. From the start date forward, all transactions must be entered in Accounting System. No transaction detail or financial reports will be available in Accounting System before the start date, however that information may be found in your old system.
Generating beginning balances from last year's tax records
Your previous year's tax records are a good source for beginning balances, if your accountant prepared what is known as a "trial balance." Your accountant will have examined the accounts on the trial balance and will have adjusted for items such as depreciation and amortization.
Using these balances is a good starting point for your accounting system, but there is a trade-off if the current date is not close to the beginning of the year: most small businesses use a calendar year for tax reporting, and all transactions between the start date and the current date must be entered before the accounting system can be used.
If the current date is late in the year, there may be a lot of data entry that needs to be completed before accounts reflect current balances. The best way to summarize data is in a database — which is exactly what an accounting software program is.
Calculating balances from scratch
If you have no Accounting System, you still need to determine a start date and calculate balances as of that date from whatever records you have. Begin with the balance per the bank, add deposits in transit (those not shown on the bank statement) and subtract outstanding checks (checks issued but not cleared). Review amounts due from customers as of the start date. Include customer balances that were due on the start date but have since been paid. As you create each customer record you will have the opportunity to enter their beginning balance as of the start date. Similarly, accumulate all of the bills due to vendors as of the start date, even if they have been paid. You will enter these bills when you create vendor records. Checks written after the start date that pay bills outstanding on the start date will be applied to the vendor's balance rather than to an expense account.
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