In many small businesses, proper accounting is overlooked. Fact is, many of the income and expense items, go undeclared due to a weak accounting system. Even with a good accounting package, expenses (and income) can be under reported.
How is this so? When the best accounting software is used to record all the transactions? Unfortunately for many businesses, manual inventory control, cash sales and cash purchases and expenses, will remain the norm.
It is with the cash transactions outside the computerised system, where much of this oversight occurs. Electronic bank transfers, be it payments or deposits are identified swiftly on the bank statements, or credit card records accessed via the Internet. These transactions can then be easily replicated on to an accounting software package, and produce accurate reports.
The transactions outside the electronic system, however, can proof to be problematic.
Let me illustrate by way of this example:
1) For certain months, the telephone bill is paid, using the owner’s credit card.
2) The owner pays for gas for the business vehicle.
3) Expenses paid out of the petty cash are not recorded, since a voucher or two was not furnished.
Cash sale proceeds are used to purchase additional inventory. The sales invoice and purchase invoice for this accounting transaction, is not reconciled, surplus cash is not declared. This will invariably lead to an understatement of sales purchases and expenses.
It is accepted, that the above scenario is totally unacceptable, the reality however, is that this occurs, in many small businesses around the globe. Due to this under reporting, businesses do not have a clear indication of their true performance.
· Income
If uncertainty exists about the income figures for a month or period, check the cash sales journals. If unsuccessful with sales journal scrutinize the order books. Lastly, perform a verification with the customer, if they received goods ordered, and if they in possession of a receipt.
· Expenses/ purchases
Check all available records. Contact suppliers for copies of cash expenses invoices.
· Cash control
Receipt book verification versus cash banked and utilized can assist in uncovering missing amounts from the accounts system.
All business expenses paid for by the owner should be recorded in the books of account of the business. Perusing the owner’s credit card or bank accounts would enable the bookkeeper to trace these expenses.
Vigilance, and control over all expenses and income flowing through the business is of utmost importance. Ideally, the business should refrain as much as possible from dealing with cash, if not possible, proper control should be exerted over the cash sales and cash expenses.
Recording and controlling cash income and expenses is not rocket science! It is the lack of discipline from both business owners and employees alike that creates accounting problems.
