Tracking Income and Expenses



The task of tracking a business's income and expense is really the most important job of an accounting system. If you own or manage a small business, obviously, you need some tool for measuring your income and your cash flow.

Although checkbook programs like Quicken and Microsoft Money do little more than keep a checkbook, you can actually keep financial records for a business right out of a checkbook. To do this, you simply categorize deposits as falling into some income category. And when you write a check or make some other withdrawal, you categorize expenses as falling into some expense category.

One problem with using a checkbook program, however, is that by using a checkbook program, you are implicitly using cash-basis accounting to track your income and expenses. Cash-basis accounting counts income when you receive a deposit and counts expense when you write a check.

Cash-basis accounting is easy to understand, and that means you are less likely to make errors in implementing it. However, cash-basis accounting is generally too imprecise for more complicated businesses. If you use inventory in your business, for example, cash-basis accounting isn't very accurate—and the Internal Revenue Service does not allow it.

And there are other circumstances, too, in which cash-basis accounting produces serious and usually unacceptable errors in precision. For example, if you often receive money before you have actually earned it or if you often incur expenses long before you actually have to pay for them, you need to use a more sophisticated accounting program than a checkbook program.

Generating Business Forms

The second task that a small business accounting program should help you with is the generation of business forms. The most common business form is simply a check. Any checkbook program help you do this. Other business forms that small businesses commonly need to produce include invoices, credit memos, monthly statements, purchase orders, and so forth.

If you have a small business with very simple form requirements—perhaps you need only checks—then a checkbook program may work very well for you.

However, if you have extensive or complicated business form generation requirements, a more full-featured small business accounting package, such as Intuit's QuickBooks, Peachtree's Complete Accounting, or Microsoft Small Business Accounting will do a better job for you.

If you produce more complicated forms, but you produce these other forms with a word processing program, then a checkbook program may still work for you.

Detailed Record Keeping for Other Assets and Liabilities

The third task that a small business accounting program should help you with is detailed record keeping of your most important assets and liabilities. A checkbook program lets you keep good detailed records of cash, and for some businesses that is the principal asset. But many small businesses have other significant assets and liabilities they need to track, for example, accounts receivables, inventory, and vendor payables.

Whether or not a particular software program's accounting tools provide adequate asset and liability record keeping depends on the situation. However, no small business accounting program does everything you need it to do. Any accounting program that provides an extensive list of features, by its very nature, becomes a challenge to use. For example, moving to the accrual basis of accounting adds an entire layer of complexity to financial record keeping, and keeping detailed records of inventory adds another layer.

For these reasons, even when a particular program doesn't do everything you need it to do, your best choice still may be to use the program—and then simply live with its shortcomings.