Dangers of Poor Bookkeeping

The Dangers of having poor Bookkeeping Records
An area that hasn't been discussed much as being one of the major reasons contributing to the failure of a business is poor bookkeeping records kept by a business.

Many businesses fail because of inaccurate record keeping. Good record keeping is necessary to highlight problem areas that could cause the failure of the business, or enable information to be extracted so that compliance for taxation can be met on time. Most businesses neglect their bookkeeping and record keeping because of lack of time, lack of expertise or lack of funds to pay someone to take charge of this area.

Business owners give priority to increasing sales and generating profit, but fail to see that if a bookkeeping system is inadequate and unable to highlight situations that need to be corrected, things can happen that will cause the business to fold, even if sales are increased.

Why you need a Sound Bookkeeping System
Every business needs a bookkeeping system so that at any time it is able to extract information that will highlight how the business is doing.

A good bookkeeping system will provide the following information:

  • It will show what income is coming into the business
  • It will show what money is being paid out of the business
  • It will show how much cash is sitting in your bank account
  • It will show how much money is due into the business from debtors (those that you have made sales to on credit)
  • It will show how much money is due to creditors (those from whom you have purchased goods on credit)
  • It will show the amount of stock and its value sitting in your shelves, factory or stores
  • It will show the amount of money that is paid for wages and salaries of staff
  • It will show the assets that the business owns at any particular time
  • It will show the liabilities or debts that the business owes at any particular time
  • It will show which products are selling the best and which are slow moving
  • It will show what profit or loss the business is making at any time
  • It will also enable a valuation of the business to be carried out based on the results in the system

Every business needs to have some sort of system whether simple or complex and an accountant should be consulted to assist you in this area if you do not have the experience to put in place a system yourself.

What makes up the Bookkeeping Books?
Bookkeeping books are as follows:

  1. Journals - From a transaction such as a sale or a purchase a journal entry is raised. This originates from the source or original documents which record the transaction. In a business where a lot of transactions are happening at the same time, it is usually a good idea to create sub-journals so that it is easier to find or allocate transactions. These sub-journals would usually be in the area of credit sales (Sales Journal), credit purchases (Purchases Journal), sales returned (Returns In Journal), purchases returned (Returns Out Journal), cash income received (Inwards Cash Book), cash expenses paid (Outwards Cash Book) and "non cash" transactions (General Journal).

  2. General Ledgers - The summary and totals of all the journals are entered into a larger account called the General Ledger. The General Ledger is a summary book that records all the accounts of the business and is organised into various classes for ease of classification and location. These classes are:

      • Assets - This is a record of all items the business owns.
      • Liabilities - This is the record of all the items that the business owes to others (i.e. its debts).
      • Sales - This is a record of all the revenue or income earned by the business for a particular period.
      • Expenses - This is a record of all the expenses or costs incurred by the business for a particular period.
      • Capital - this is a record of the ownership or "equity" that belong to the owners or shareholders of the business.

  3. Trial Balance - At the end of each accounting period or accounting financial year the accounts in the General Ledger are totaled and balanced off. The balances in each account are then summarised and put into another report called the Trial Balance. The Trial Balance is a list of all the balances in the General Ledger - hence the term Trial Balance.

  4. Financial Statements - The information in the Trial Balance will then be interpreted and put into reports known as Financial Statements. Financial Statements consist of Revenue or Income Statements (also known as Profit and Loss Statements), Balance Sheets and Cash Flow Statements 

  5. Revenue Statement - this report shows the income and the expenses of the business plus arrives at the net result after expense are deducted from income. The net result is known as the Net Profit (or Net Loss if expenses are greater than income). It is in effect a statement showing theperformance of the business in monetary terms.

  6. Balance Sheet - this is simply a report of the financial condition of the business at any time and records its assets, liabilities and capital. It is in effect a statement of the position of the business . The Balance Sheet is a list of all the balances remaining in the accounts of the business at the end of a particular accounting period. 

  7. Other Statements - These include reports such as Cash Flow Statements which identify the amount of cash coming in and how that cash was applied or used.