by Bill Steele

Created on: September 12, 2008

An important part of starting your own business is getting used to keeping business records. You need to know all the time how your business is doing, because if you are not making money you will need to make changes. Also, the taxman is interested in how you are doing as well!

You need to keep the books. You can pay someone else to do it for you, but that costs money. If you keep the books yourself, you have all the information. No-one understands your business like you do. One good option is to get an accounting software package. They help by making a lot of the routine work easier, but it would be good if you could also understand what the accounting software is doing, so that you understand the results.

A few principles of bookkeeping:

1. Think of an account as a page with a line down the middle. Transactions are recorded on one side of the line or the other, We'll see shortly how to decide which side.
2. The left side is called debit, and the right side is called credit. Since Dickens wrote about accounts clerks, debits are known as being "the side nearest the window" because his rows of accounts clerks all faced the same way.
3. Every transaction is recorded twice, once as a debit, on the left, and the other as a credit, on the right. Debits are assets (what the business owns) and credits are liabilities (what the business owes).
4. The books record each transaction from the point of view of the business. Each party to the transaction has a different view. For example, if you put money into a bank account, you have an asset the bank owes you the money back so it's a debit. For the bank, it owes you the money, so for them it's a credit.
5. Remember that money coming in is a debit, and money going out is a credit to the cash account. It may seem counter-intuitive, but that's only because we are used to thinking in terms of the way banks keep their books when "you're in credit" you have funds available. That's only because the bank is recording the fact that it owes you money.
6. So follow the cash. If money is coming in, it's a debit to the bank, and you have to record a credit somewhere. If it's money going out, it's a credit to the bank account, and you have to record a debit somewhere.
7. Next, think about what the money was for. If it is cash from customers, there are two ways of dealing with it. If you have sold on the basis that the customer pays you later, then you will have an asset the money due from them created already. That entry is to debit receivables

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