In this video you'll find out how to organise your business's finances using
an ancient technique. It's simple,
it's free and you can have it up and running
in a matter of minutes.
[Music]
Hey there,
welcome back to the channel. I’m James
This is Accounting Stuff and in today's video we're
going to head back in time…
Why? Because I want to show you a
‘quick and dirty’ method that you can use to start
bookkeeping your small business today. Have you ever struggled with keeping a
record of all of your sales and expenses? Can you tell me what your profit or loss
for last month was?
Maybe you've been stashing receipts
in a shoe box under the bed, but it's all good you'll sort them out
when you find the time. Don't worry we've all been there
And seriously if any of that resonates then congratulations you're watching a
video about Accounting which means you've taken the first step towards
grabbing your business's finances by the… And you can take that second step
by subscribing to this channel for more weekly accounting videos.
The biggest reason that small businesses fail is because of poor
cash flow management.
So we're going to make addressing that
our number one priority.
On Accounting Stuff we've talked a lot about
double entry accounting, even when we haven't
mentioned it by name.
The accounting equation, debits and credits,
pretty much everything we've covered in the Accounting Basics playlist
is a direct consequence of one beautifully simple idea.
That there are two equal and opposite sides to every business transaction
because in the world of finance money can't magically appear or disappear.
But in this video we're going to take all of that stuff and throw it out the window.
Double entry accounting might be one of the greatest discoveries
of the past six hundred years but it was invented for merchants in Venice who
were doing complex trade with loads of different groups of people.
Not all modern businesses are as complicated as that.
So not all businesses need to use double entry accounting.
The alternative pre-dates double entry accounting by literally thousands of years
and it still has its place today.
Especially when we're talking
small businesses with minimal financial transactions.
Can you guess what it's called?
Single entry accounting.
I'm going to show you how you can use single entry accounting
to manage your business's cash flow right now.
Don't forget to watch this video
through to the end because I have a free template
to share with you and I also want to make it clear
that this ‘quick and dirty’ template isn't for everyone.
It has its flaws so hear me out and we'll see if it fits in
with your business.
Let's go!
We'll kick things off with a definition…
The single entry system,
single entry bookkeeping, or single entry accounting.
Whatever you like to call it.
Is a method of bookkeeping that only recognises one side
of a business transaction as an accounting entry.
Bookkeeping is what we call the process of recording all of
your business's financial transactions. And that one side that we're going to
recognise is an accounting entry to the cash account.
I said earlier that the biggest reason that small businesses fail
is because of poor cash flow management. Single entry accounting is
about taking control of your cash account so you've got a record of all of the cash
flowing in and out of your business.
And what's great about this system
is that anyone can do it.
It's simple and practical.
All you need to get started is
Excel or Google Sheets
.Let me show you…
Here we are in Google sheets.
I like to use Sheets because it's free, everything safely stored in the cloud,
and all you need to do to get started is have a gmail account.
And this...
is what a single entry system looks like
in its simplest form.
We have a table that summarises all of your business's transactions
in a cash ledger.
Which is basically another name
for your cash account.
This is called a three column ledger
because we have three columns for date, description and amount.
For this example let's imagine that you're starting an e-commerce business
from scratch.
You're a keen writer, a dog lover
and a massive Harry Potter fan so you decide to combine all of these passions
together to create and sell Harry Potter fan fiction
under the pseudonym JK Growling.
Let's do the bookkeeping for
your first month in business.
Imagine we've gone back in time.
It’s January 2000, the new millennium.
The Prisoner of Azkaban came out
six months ago and you're desperate
to get started on your fan fiction.
The first thing we need to do
is identify the accounting period. So we can go and write January 2000
in the top corner of your empty cash ledger.
We now need to enter all of the transactions
that happened in January.
At the start of the month your
opening balance was zero.
This is a brand new business
so there's no cash to begin with.
You decide to head down to the bank
and open up a new checking account. That's a good call
because you don't want to get all of your business and
personal expenses mixed up in your personal account.
On the fifth you decide to transfer five thousand dollars into
your new checking account.
This is your initial investment.
If we were double entry accounting
you’d call this owner's equity.
But we aren’t.
So we won’t.
A few days later you decide to
buy a laptop from the Apple Store.
This is what you're going to write all of your fan fiction on.
You cough up a whole two thousand dollars on the spot
and enter it into your cash ledger.
Next you want to set up a website.
So you pay thirty five dollars to register a domain online and a
further one hundred dollars in hosting fees.
You complete your ebook in record time and within a couple of days you put up your first ad.
The ad clearly works because two days later you make your first sales.
Over the next two weeks you incur some bank fees,
make some more sales and decide to buy a swish new office chair
so you can write a home in comfort. JK Growling closes out the month with
two thousand eight hundred and forty three dollars in the bank,
and has made a loss of two thousand one hundred and fifty seven dollars.
We can find that by taking the total of all of your income and expenses
for the month.
Ignoring the initial investment because that doesn't fit
into either category.
Great.
So we can easily calculate
your business's profit and cash is being closely monitored.
But on closer inspection…
This template just looks like
a copy of your bank statement?! If only there was a way to get some more detail.
Then this would become really valuable to us.
And that is where the multi column approach comes in.
The multi column ledger works
in a very similar way to the three column ledger.
We still have the three columns
for date, description and amount.
But in the middle we’ve packed in some extra detail.
The first thing to note is that we now have a reference column.
This is essential for any organised
bookkeeping system.
In this column we give each transaction
a unique reference number to help us identify it.
And if you're really savvy you can save back up documents that support
each transaction in your Google Drive with a naming system that corresponds
with these unique reference numbers.
That way you can easily find and
pull out the invoice for your office chair if you need it.
Because everything is cross-referenced. Moving on to the right…
We have grouped the columns into two main categories…
Cash in and cash out.
This allows us to categorise all of our income and expenses
into their own distinct columns. This will be a big help when tax time
comes around because it makes it easy to identify all of JK Growling's
taxable income and deductible expenses.
Now we're talking!
You can set up one of these templates for yourself by copying this layout.
Or if you'd like to save some time, you can use this one for free
and get started right away. I'll drop a link to it down in the description below.
Just delete the sample data and you can get cracking.
One important thing to note…
You will need to check the transactions in this template against the ones
in your bank statement each month to make sure that none are missing.
This is called doing a bank rec and it's critical because an
incomplete cash ledger isn't much used to anyone.
I've made a video explaining how to do a bank reconciliation
that you can find up here in the corner.
So that's how to start bookkeeping
for your small business the ‘quick and dirty’ way.
This works great if you have minimal transactions
because it's fast and easy to maintain. Very little accounting knowledge is
required so you might be able to get away without having to hire a
qualified accountant or bookkeeper.
Hold up… that been said,
this system does have its flaws.
It's the ‘Quick and Dirty’ method after all.
It's not for everyone. The double-entry accounting system is
one of the greatest discoveries of the past 600 years
because there are two sides to every financial transaction.
This single entry accounting system only recognises one of these sides
so it gives you an incomplete picture of your business's books.
You're also cash accounting so you'll be exposed to all
of the disadvantages of that method. Things like fluctuating profits
caused by recognising related income and expenses in separate accounting periods.
More on that in this video. Another problem with cash accounting is
that you have no idea what your business's financial position is.
Which is not ideal if your business buys or sells
on account with credit terms because you won't be tracking your
accounts receivable and accounts payable. So if that's the case then
what's the point? This single entry accounting method is a
great place to start for anyone who runs a small business with few transactions
and little to no assets or liabilities. Especially if you don't have a
bookkeeping system in place yet.
This technique will help you get
your books in order.
Many small businesses are using
a variation of this right now. However double entry accounting is the
king of all accounting systems!
It's a much tighter method
with built-in checks that leave less space for errors.
It also gives you a complete record of your financial transactions.
There's a reason why all large businesses use
double entry accounting.
So I would seriously consider
upgrading to it at some point. The good news is that
a single entry accounting record can be transferred into a
double entry accounting system at any time.
And if you've got things
organised using a template like the one I've linked below
then it will make the whole process a lot less stressful.
These days double entry accounting
is becoming more and more accessible
to everyone. There are a whole bunch of
cloud accounting software packages out there that do all of the
double entries for you so you don't even have to think about them.
A couple of the biggest names are QuickBooks Online and Xero.
I'll link to a free trial of QuickBooks Online down in the description.
And here's a video that I made that will give you a
general overview of how it works.
If you'd like to learn more about
double-entry accounting I made a whole playlist covering
accounting basics for beginners that you can find here.
Any questions let me know down below in the comments.
And you can subscribe to Accounting Stuff
by clicking on this circle for more weekly videos.