Bookkeeping is one of the great bugaboos for any small business person, whether for simple banking purposes, tax documentation or business analysis. Most people don’t go into business because they want to learn accounting, but a certain amount of accounting is necessary and inevitable. With the caveat that I am just a computer guy and NOT a tax expert or accountant of any kind, here are some of my thoughts on small business bookkeeping, especially on the Macintosh.
What and Why?
One of the first questions I ask someone who wants to use a computer is what do they want to do with the computer and why? A lot of people create unnecessary complications on their computers and in their life by doing things without a clear purpose, and this is especially true of bookkeeping. Why are you interested in bookkeeping or accounting? The person who merely wants to keep a check register so they avoid overdrafts has very different needs from the single designer who wants to track basic expenses to simplify tax-time. Both of these are different from the person who regularly creates quotes or estimates and invoices, or someone who sells physical inventory items, or someone who has sells items from storefronts in two or three locations.
Most people who do are interested in “bookkeeping” are interested in simplifying their business life so that they can analyze trends and more easily prepare for taxes. More sophisticated analysis of financial data is beyond the scope of this article, but basic balance and tax information is a superb place to start.
Date, Direction and Details
The basic thing that people track in bookkeeping is financial transactions, such as a single purchase or a check, and there are three basic things you will want to track about any transaction.
- Date: when it took place, a specific day with year
- Direction: whether money was coming in or going out
- Details: Who to/from, a check number, a category or purpose
Charts of Accounts
A chart of accounts is simply a list of the ways you will track your money. A fundmental principle of double-entry bookkeeping is that every transaction is recorded twice: once in the general ledger (equivalent to the average person’s bank statement or check register) and once on a separate page for its relevant category. The word “account” here is a technical term in bookkeeping, but this is what simple programs such as Quicken call a “category.” Any business person should probably have a real accountant (the kind with a CPA license) prepare or review their chart of accounts, but most charts of accounts divide things up into major categories such as revenue (what normal people call “income”), expenses (what normal people call “expenses”) and other categories such as liabilities, assets, and cost of goods sold.
The drop-dead simplest way I know of to introduce people to the concept of a chart of accounts is to show them a check register and then train them to place a single letter behind every amount they put in their checkbook. If I spend money on advertising, for example, I might put a little “A” after the check amount, and I will never use that letter for anything other than an advertising expense. If I pay taxe of any sort I might put a little “T” after that in my check register, and I will never use that letter for anything other than a tax payment. Most people, though, need a more sophisticated chart of accounts.
Because every business is different and different tax laws apply, it is absolutely important to spend an hour or so with an accountant clarifying your chart of accounts so that you understand it exactly. Your accountant will know whether postage stamps you buy should be identified as a business expense, advertising or cost of goods sold, and what the tax ramifications are of these decisions.
Begin With the End in Mind
The second habit in the bookSeven Habits of Hightly Effective People is to “begin with the end in mind” and this principle will save you a LOT of trouble in bookkeeping. If your only purpose in keeping books is to avoid over-drafts, you have very different needs than the person who is trying to analyze retail trends for five different stores. Most people keep books to simplify their taxes, so one of the best tricks I know is to start your bookkeeping with a copy of last year’s tax form or (if you are just starting out) the one you would have filed had you been in business. For most sole proprietors this will be some variation of the IRS form 1040 Schedule C “Profit or Loss from Business” or SE “Self-Employment Tax”. There may also be various city, county or state forms that apply.
Beginning with these tax forms allows you to determine the absolute minimum number of useful things to track. Some of the categories you will want to track in your chart of accounts if using Schedule C, for example, might be repairs and maintenance, advertising, taxes and licenses, car and truck expenses, etcetera. Listing these is easy, but most people should speak with an accountant to understand the details of what expenses will fit into what categories and how to track income for maximum simplicity. Technical people sometimes call the level of detail you can track “granularity” and either too much or too little is a waste of time, resources and sanity.
Which Accounting Program to Use
Usually when people ask me about bookkeeping they begin by asking me which computer program they should use, and my answer almost always starts with two words: “It depends.” Depending on some of the answers to the above questions about what they will track and why, on what their chart of accounts is and what their accountant says, I will begin to look at such things, and sometimes the answer is not to use a program at all, but instead a good paper system. I love computers as much as any red-blooded American child of the 1970’s, but they are not always the best choice for all people, and as I often say “one size fits none.” Instead of programs I focus on approaches.
I often distinguish accounting from bookkeeping. Accounting is a formal discipline, with professional standards and licensing and oodles of laws, none of which I am qualified to speak about with any authority. Bookkeeping is a set of practices, physical acts that often feed into accounting. The difference is similar in many ways to the difference between mathematics and arithmetic, and most small people just need to understand basic bookkeeping, the arithmetic and file-folder end of things.
A lot of small businesses would do best to come up with a simple system that works for them. Paper systems are simplest and begin by writing small notes on all your receipts and bills that minimally include the date and what business purpose a receipt had. Something as simple as “storage boxes for old client files” is a good start.
- “The shoebox” method of putting all your receipts and bills into a shoebox or grocery bag, is simplest. This is better than nothing, but not much better. If you use a single cardboard file box each year (as one client of mine did) consistent use of this method is a sort of “archaelogical accounting” so that when you drop it in some harried soul’s lap near tax time, the oldest papers will be at the bottom of the box, which simplifies things somewhat.
- Next up is “three envelopes” where you find and label three large manila envelopes as “incoming” and “outgoing” and “other,” labeling everything as to its date, then segregating them somewhat to simplify sorting and recording later. Some people try this with file folders, but my experience is that envelopes are more accessible and easy to keep track of as one is adapting to any system. My favorite envelopes for this system are the sturdy kraft-paper “inter-office memo” kind with a button-and-string fastener, pre-lined for making notes on the outside of the envelope if need be.
- “More envelopes” is a variation on three, where folks divide things up into twelve envelopes (one for each month) or some other system, which further refines the basic sorts of transaction information of “date” and “direction” and “details” with physical separation into finer and finer sub-groups. File folders will work as well, and may or may not be a physical advantage over envelopes. Some folks use envelopes to gather documents at first, then move them to file folders for long-term storage.
- “Ledger paper” uses real accounting ledger paper or something similar (such as notebook paper) to keep track of income and expenses. Receipts and papers that are gathered in the other systems are recorded into a sort of log or ledger so that each line notes the date and direction and details of the transaction. A general ledger with “category” information from the chart of accounts is terrific, and this can be kept on one page or a collection of pages (as was done in the days before computers).
Entering things onto the computer can make them easier or not, depending on how they are entered and how consistently you use the system. I always encourage people to have someone help them set things up properly at the start, and I frequently do this for clients once we have clarified what they are tracking, why they are tracking it and have a good chart of accounts (preferably reviewed by an accountant). On the computer there are many options.
- Plain ASCII text: for folks who like to keep things as simple as possible, a plain ASCII text document in an email message or on a Palm Pilot or in TextEdit, with one line per transaction noting the date, the direction and details of each transaction is a fine place to start. If you want more detail, make it a whole paragraph, but begin every entry with the date in a consisten format such as 02/29/2000 or 2000-02-29 (for February 29, 2000) so it will be easier to sort later if you so choose.
- Spreadsheet: a spreadsheet is just electronic ledger paper, and most businesses can track their main stuff in a simple five-column spreadsheet to record: date, from/to, check/invoice number, the category of the transaction (from thier chart of accounts) and a small memo box for notes. Basically this is a one-line-per-transaction version of a basic check register, in a format which is simpler to sort and work with later than plain ASCII text. One major advantage of spreadsheets is their relative simplicity and transparency and the ubiquity of programs such as AppleWorks, Excel and free alternatives such as NeoOffice J, Open Office and others.
- Quicken: The most popular program for personal finance on the Macintosh is probably Intuit’s Quicken. Bundled with many new Macs and available as a download or physical CD for $70 it is a terrific way for many small business to track basic information. The main trick to setting up Quicken as a useful business program is to NEVER use the built-in categories but instead to create a new file with no categories whatsoever and then enter your own chart of accounts (as reviewed by your accountant) by hand instead. This easily provides the granularity of date, direction and details in a way that most people can understand. Another bonus to using Quicken is that most financial institutions which offer online banking also allow you to download your account information directly from their web site in the “.QIF” format, which imports the same numbers that are on your bank statement directly into the program. Besides transaction tracking, Quicken can generate a variety of simple reports and print checks if you so choose.
- QuickBooks Pro 2006 for Mac: Intuit’s offering in the small business space is $200 and integrates increasingly well with Mac OS X, including tie-ins to such OS X technologies as iCal and Address Book. QuickBooks Pro provides billing and invoice functions that small businesses need, and some inventory management for a single location. If your accountant uses QuickBooks for Windows, the new Mac version allows you to save a copy of your file in PC format to send to them directly, which some accountants prefer. Intuit also has a program where accountants can choose to affiliate themselves with Intuit, pay a fee and demonstrate competence to be listed as certified consultants. For folks who are moving from Quicken, this program will import Quicken for Mac data and provides a similar interface in many ways.
- First Edge from MYOB is the least expensive small business accounting program for the Mac and the best value, in my opinion, because it has serious accounting functions, imports and exports more easily to non-Intuit programs (such as FileMaker) than other programs, and can be “scaled” up to more sophisticated uses more easily than any other program by transitioning to the more serious Account Edge program. At $100, this program has button-driven interface elements that clarify accounting procedures to non-accounts, and which people either hate or love. MYOB also maintains a list of certified consultants familiar with the product, and if your accountant does not have a copy of MYOB they can usually request a free copy, to better understand it and help you.
- Account Edge comes in various versions and is probably the most sophisticated accounting program in wide use by small businesses on the Macintosh platform. Available in either a standalone or a network edition for $300, with workstation licenses (for the network version) available for between $100 and $150. Account Edge is probably the best choice for most multi-location retail businesses where multiple Macs will coordinate at the separate stores.
- MultiLedger from CheckMark is not as widely known as products from MYOB or Intuit, but has its advantages, proponents and advocates. At $400 for a network-ready license for up to ten users, it is frequently the least expensive option, and many believe its siser product (CheckMark Payroll) is the best such option on the Macintosh. Like MYOB’s products, MultiLedger works much more nicely with other programs than QuickBooks, allowing tab-delimited import and export of almost everything.
- Running Windows programs is also an option, especially with the Intel Macs which began shipping in early 2006. Although I have not tested these options extensively yet, my initial efforts seem to indicate that QuickBooks Pro Retail and QuickBooks Pro Enterprise both run quite nicely under both Boot Camp and Parallels. I have not tryed using QuickBooks Point of Sale on the Mac yet, but am less optimistic about those possibilities, given the wide array of legacy connections (including serial and parallel devices) so common among point-of-sale hardware. If this would be of interest, please telephone me directly at (360) 695-6929 to discuss your options.
Whichever solution you choose, the system you think about and actually use will be better than a system under which you do neither. As with so many things in business and in life, the hardest part of tears-free bookkeeping is simply showing up.
Almost all of the accounting programs for Macintosh have feature tours and even videos available online. May your ledgers always balance.
- Intuit Quicken 2006 for Mac.
- Intuit QuickBooks Pro 2006 for Mac.
- MYOB FirstEdge and AccountEdge compared.
- CheckMark MultiLedger
- IRS Schedule C “Profit or Loss from Business” in PDF format.
- IRS Schedule C EZ “Profit or Loss from Business” in PDF format.
- IRS Schedule S “Self-Employment” in PDF format.