4 Conceptual Tips on Balancing Your Accounting Books
Business owners of starting companies handle so many duties all at once. For some who are also starting small, they usually hire minimum staff. Therefore all the operations management duties and bookkeeping fall on their shoulders.
Further, it is extra problematic if they don’t get to balance the books on the first try. It can be very tiresome to try again and again to balance the books.
You start wondering why you’re having issues balancing your accounting books. You ask yourself whether there are problems with your computations. Or think if you made mistakes in classifying transactions.
Those are probably a few of the problems you have to address. Here are 4 Tips to better keep your accounting books.
Business owners who keep their accounting books usually have problems with understanding the concepts behind the bookkeeping process. To better balance your accounting books, you have to learn accounting principles and concepts.
1. Apply Double-Entry Bookkeeping
Simply put, double-entry bookkeeping means recording your transactions using at least 2 accounts. There should be at least 1 debit entry, and at least one credit entry.
Debit and credit rules vary per account type. You use debit to increase asset and expense accounts, and credit to decrease them. You use credit to increase liability, owner’s capital and income accounts, and debit to decrease.
For instance, in recording a sale of merchandise, there is an increase in both asset and income accounts. Receipt of cash from customers increases cash and the sale transaction increases income. You record this with debit on Cash (increase in asset) and credit on Sales (increase in income).
2. When in Doubt, Think of the Accounting Equation
The accounting equation shows that your assets should equal liabilities plus owner’s capital. This equation should balance for every accounting entry.
Assets = Liabilities + Owner’s Capital
Let’s take a cash loan of 100,000 as an example. In a double-entry perspective, this transaction involves an inflow (debit) of cash and an increase in liability (credit).
Debit: Cash 100,000
Credit: Loan 100,000
When viewed in the accounting equation, it should be like this.
Cash 100,000 = Loan 100,000 + 0 Owner’s Equity
The equation should always be balanced. Otherwise, there could be mistakes in your account classification.
Using the both double-entry system and accounting equation involves a comprehensive knowledge of the accounts. You should know which accounts are affected in every transaction. Once you master this, using the accounting equation is much easier.
3. Recheck With Trial Balance
The trial balance is a tool used to check the equality of the debits and credits of your record. To do a trial balance check, you gather your ledger accounts and tally all the debits together on the column, and the credit in the right column. The debit column should equal the credit column. Inequality between debit and credit is an indicator or mistake in the classification of accounts, recording of amount, or computation.
Companies should do a trial balance as often as possible. The more frequent, the earlier could you spot unbalanced books and remedy them.
4. Separate Personal From Business Transactions
The economic entity assumption in accounting states that the owner and the business are separate. This is why the owner has its account named ‘Owner’s Capital’. Any recordable transaction of the owner with the business is recorded. For instance, owner investment of cash is recorded as follows.
Debit: Cash Php XXX
Credit: Owner’s Capital Php XXX
Further, you should not mix personal activities with the business. The owner’s purchase of furniture for his house should not be recorded in the company books. Further, the purchase of office tables should not be interpreted as the owner buying the furniture, but the business purchasing the table. The owner and the business are two distinct entities.
Do You Need Assistance Balancing Your Accounting Books?
It’s no secret that bookkeeping and accounting are hard. Accountants study 4-5 years in college to get their degrees. For business owners managing the books themselves, learning it on your own will still leave you confused about some concepts.
3E Accounting can help you with your books! 3E Accounting is an established Accounting Firm in the Philippines. They employ experienced and expert bookkeepers in the Philippines. Contact them today and address your problems with a professional perspective.