Cash vs. Accrual Accounting

There are two basic accounting methods available to most small businesses: cash or accrual.

Cash method. If you use the cash method of accounting, you record income only when you receive cash from your customers. You record an expense only when you write the check to the vendor. Most individuals use the cash method for their personal finances because it's simpler and less time-consuming. However, this method can distort your income and expenses, especially if you extend credit to your customers, if you buy on credit from your suppliers, or you keep an inventory of the products you sell.

Accrual method. With the accrual method, you record income when the sale occurs, whether it be the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later. The accrual method gives you a more accurate picture of your financial situation than the cash method. This is because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched against the expenses that correspond to that period, so you get a better picture of your net profits for each period.

Pros and cons. The cash method is easier to maintain because you don't record income until you receive the cash, and you don't record an expense until the cash is paid. With the accrual method, you will typically record more transactions. For example, if you make a sale on account (or, on credit), you would record the transaction at the time of the sale, with an entry to the receivables account. Then, when the customer pays their bill, you will record the receipt on account as another transaction. With the cash method, the only transaction that is recorded is when the customer pays the bill. If you are using computer software to do your accounting, this is probably not a big concern, since the computer program automates much of the extra effort required by the accrual method.

Another issue to be considered is the accounting method you use for tax purposes. For convenience, you probably want to use the same method for your internal reporting that you use for tax purposes. However, the IRS permits you to use a different method for tax purposes. Some businesses can use the cash method for tax purposes. If you maintain an inventory, you will have to use the accrual method, at least for sales and purchases of inventory for resale.

We recommend the accrual method for all businesses, even if the IRS permits the cash method, because accrual gives you a clearer picture of the financial status of your business. You probably need to keep a record of accounts receivable and accounts payable anyway, so you are already keeping track of all the information needed to do your books on the accrual basis. If you are using a computer program, there really isn't much extra effort involved in using the accrual method.

Who Can Use the Cash Method?

Although the IRS allows all businesses to use the accrual method of accounting, most small businesses can instead use the cash method for tax purposes. The cash method can offer more flexibility in tax planning because you can sometimes time your receipt of revenue or payments of expenses to shift these items from one tax year to another.

However, some businesses must use the accrual method: corporations that are not S corporations and partnerships that have at least one corporation (other than an S corporation) as a shareholder. There are some exceptions to these restrictions — the cash method is available for farming businesses and entities (including corporations) with average annual gross receipts of less than five million dollars for all prior years.

Tax shelters may never use the cash method. If your business has inventories, you must use the accrual method, at least for sales and merchandise purchases.

If you are thinking about using the cash method of accounting for tax purposes, you should discuss these rules with your accountant.

Single- or Double-Entry Accounting

The double-entry system provides checks and balances to ensure that your books are always in balance. In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. Because debits equal credits, double-entry accounting prevents some common bookkeeping errors. Errors that aren't prevented are easier to find. Double-entry accounting is the basis of a true accounting system.

With double-entry accounting, every transaction in your business affects at least two accounts, since there is at least one debit and one credit for each transaction. Usually, one of the accounts is a balance sheet account. Entries that are not made to a balance sheet account are made to an income account or expense account. Income and expenses affect the net income of the business, which ultimately affects owner's equity. Each transaction (journal entry) is a real life example of the accounting equation (assets = liabilities + owner's equity).

You provide consulting services, on account, to one of your regular customers, Betty Fry, for $1,500. When you write up the invoice, you would make the following bookkeeping entry in your sales journal:

	Debit	Credit
Accounts receivable (Fry)	1,500
Consulting revenue		1,500

These entries show that your accounts receivable (a balance sheet account) has increased by $1,500, and your consulting revenue (an income statement account) has also increased by $1,500.

Upon receipt of the invoice, your customer sends you a check for $1,500 in payment of her account. When you receive the check, make the following entry in your cash receipts journal:

	Debit	Credit
Cash	1,500
Accounts receivable (Fry)		1,500

These entries show that your cash (a balance sheet account) has increased by $1,500, and your accounts receivable have decreased by $1,500.

Single-entry accounting. Rather than dealing with debits and credits, some businesses just record one side of the transaction. This is a single-entry accounting system. In the above example, you would simply record the revenue amount of $1,500 in your sales journal. However, you would also want to make a separate entry in your accounts receivable ledger, so that you keep track of all customers that owe you money.

We recommend a double-entry accounting system because it will result in more accurate financial records. Because debits must always equal credits, a double-entry system will help you find common bookkeeping errors. Such errors include an amount entered incorrectly, forgetting to record a transaction, improperly copying an amount from one page to another, and transposition errors. If your accounts don't balance (total debits don't equal total credits), you know you've made an error that must be investigated.

If you use a computer, the good news is that many accounting software programs will allow you to make a single entry for a transaction, and the software will make the second entry for you. The double-entry system is still there, but it exists mostly "behind the scenes."

Daily Recording of Transactions

In order to take control of your financial recordkeeping, you must accurately record your day-to-day sales, purchases, and other transactions. Specifically, you need to record:

• sales and revenue transactions
• cash transactions
• accounts receivable, if you extend credit to your customers
• accounts payable, if you purchase from your suppliers on credit
• summaries of transactions in your general ledger

Do you have more than one product line or department? If possible, you may want to keep a separate set of books for each. Separate accounting will provide you with more meaningful information. It may show you that one product line or department is profitable, and another is not. Unfortunately, it may be difficult to keep a separate set of books for each product line or department. For example, some or all expenses may not apply to only one department, but must be allocated among departments. You should seek the advice of an accountant before setting up an accounting system of this nature.

There are many computer programs on the market to help you automate your accounting procedures. Shop around. Accounting software is sold in office supply stores, software outlets, electronics stores, mail order houses, and directly from software publishers. Ask for your accountant's opinion. Your accountant may want you to use a program that is compatible with the system he or she uses.

If you have employees, look for accounting software that permits the use of passwords to control access to all or some of your accounting transactions. In order to prevent irregularities by your employees or others, it's wise to restrict access to your accounting records.

Whether your business is a sole proprietorship, partnership, or corporation, always keep your personal transactions separate from your business transactions. For example, using business funds to pay for personal expenditures complicates your recordkeeping and can lead to serious tax problems. It can also result in some hefty accounting fees as you pay your accountant to sort it all out.

Sales and Revenue Transactions

You record daily sales in a sales journal. To simplify your bookkeeping, we recommend a combined sales and cash receipts journal. With a journal that combines sales and cash receipts, you record all sales (cash and credit) and all cash receipts, including collection of accounts receivable, in one journal.

Entries in your sales and cash receipts journal come from the source documents you use in your business every day. These documents are sales invoices, daily cash register totals, daily cash sheets, and daily sales registers.

Sales invoices. If you use sales invoices, you will post the information from each invoice to an entry in the sales journal. If you maintain customer charge accounts, you will also be posting entries to the accounts receivable ledgers so that each customer account is up-to-date. Sales invoices should be numbered. At a minimum, prepare two copies; give one copy to the customer, and retain the other. Preferably, you should prepare the invoices in triplicate, with two copies retained by you. File one by customer name; the other by invoice number. Include canceled or voided invoices when filing by number, so that you can account for all of them. The invoice should show the date of the sale, quantity, if applicable, price or rate, an extension column, if applicable (quantity multiplied by price), and a payment due date.

If you use a computer software program to perform your accounting, it probably has a pre-designed sales invoice that you can use. Microsoft Word Version 6.0 also contains a template that may be used as a starting point to design your own sales invoice.

Cash register totals. If you use a cash register, daily sales can be totaled on the register. Most new cash registers should be able to separately record cash sales and charge sales, and keep track of sales tax. Some should also be able to record cash received on account. At the end of the business day, record your cash register totals in the sales journal.

You total the cash registers of your automotive supply store at the end of the day. The totals show cash receipts of $1,640, cash and charge sales of $1,325 and $450, respectively, which include sales tax of $75, and $315 received for payment on customer charge accounts. You will make the following entry in your combined sales and cash receipts journal:

	Debit	Credit
Cash	1,640
Accounts receivable	450
Sales		1,700
Accounts receivable		315
Sales tax payable		75

When you become more comfortable with bookkeeping entries, you could simplify the above entry slightly by "netting" the change in accounts receivable for the day:

	Debit	Credit
Cash	1,640
Accounts receivable	135
Sales		1,700
Sales tax payable		75

Cash sheets and sales registers. If you don't use a cash register, you can record cash receipts on a daily cash sheet and record sales on a columnar sales register. The sales register is simply a record of each sale for the day. Total the cash sheet and sales register at the end of the day. Enter the totals in the sales and cash receipts journal.

Sales and Cash Receipts Journal

There are many different types of sales journals and cash receipts journals available. To simplify your bookkeeping, we recommend a combined sales and cash receipts journal. If you are going to be recording sales and cash receipts manually in a journal, visit an office supply store. They will have many different kinds for you to choose from. Look at the different column headings, and choose the one that best meets the needs of your business. If you will be using computer software, you probably won't have to decide which type of journal to use. Your program will probably have some type of sales and cash receipts journal, but may allow you to customize it based on your type of business.

Assume that your business is a retail sales outlet that extends credit to some customers. Here is an example of a few entries in a combined sales and cash receipts journal. The following transactions occurred:

• On February 2, you sold, on credit, $476 worth of goods to Sandra Shaw. Sales tax on that amount is $24. Since Shaw owes you a total of $500 (476.00 + 24), your accounts receivable have increased by that amount.
• Also on February 2, Tamara Dwight paid you her account balance of $1,359.
• On February 5, several customers bought merchandise for cash. Total cash sales were $682. On those sales, $34 of sales tax was collected, adding up to a total of $716 of cash receipts from your customers.
• On February 6, Sandra Shaw paid her balance of $500.
• Upon completion of this journal page, you should foot all five amount columns. Since you are using a double-entry accounting system, you can check to see if all entries were recorded correctly. Make sure the sum of the debits equals the sum of the credits. Total debits: 2,575 + 500 = 3,075. Total credits: 1,859 + 1,158 + 58 = 3,075.

SALES AND CASH RECEIPTS JOURNAL FOR: FEBRUARY 2000
				Accounts Receivable
Date	Description	Invoice Number	Cash Debit	Debit	Credit	Sales Credit	Sales Tax Payable Credit
2	S. Shaw - sale on account	10034		500		476	24
2	T. Dwight - received on account		1,359		1,359
5	Daily Cash Sales		716			682	34
6	S. Shaw - received on account		500		500
Totals			2,575	500	1,859	1,158	58

If the sum of the debit columns doesn't equal the sum of the credit columns, you have a problem that you should investigate right away. You may have recorded one of the amounts in the wrong column. Maybe you charged the customer the wrong amount. Or you might have simply added incorrectly when computing the totals. It is usually easy to pinpoint the error because the debits should equal the credits for each transaction.

Your sales and cash receipts journal will probably have more columns than our sample. For example, you could have more than one column for "Sales" by splitting your sales into categories. You might have one column labeled "Parts and Supplies Sales" and another labeled "Service and Repair Revenue." This could provide you with more meaningful information. The way you do business might require additional columns. For example, if you give a discount to your charge customers who pay within 10 days, you could add a column labeled "Sales Discounts Dr."

Cash Transactions

A typical small business has a variety of different types of cash transactions, which should be recorded in a number of different places:

• Sales and cash receipts journal: to simplify your recordkeeping, we recommend that you combine your sales and cash receipts in a combined journal.
• Daily cash sheet: if a lot of cash moves in and out of your business each day, you should also prepare a daily cash sheet to reconcile your cash received and paid out for the day. If you use a daily cash sheet, you can reconcile your cash receipts with your daily deposit into your bank account.
• A bank reconciliation: a bank reconciliation, at the end of every month, verifies the amount you have in your checking account. It will also help you find bookkeeping errors and could help prevent irregularities such as employee theft.
• A cash disbursements journal: your daily cash disbursements should be recorded here.
• A petty cash fund: if your customers normally pay by check, you may need to set up so that you will have some currency on hand to pay miscellaneous small expenses. A petty cash fund isn't necessary if you use a cash register and always have currency on hand, as long you keep track of these small purchases.

Daily Cash Sheets

A cash sheet is a daily reconciliation of cash received and cash paid out. If a lot of your business is transacted in cash, such as in a retail store, you should prepare a cash sheet at the end of each day. Deposit all cash receipts in your bank account daily. Your daily cash receipts should generally be the same amount as your daily bank deposit. If they are not the same, you should investigate and reconcile the two amounts. Any reasons for a difference should be apparent on your cash sheet, such as a small amount of cash paid out for a miscellaneous expense.

An important reason to do a cash sheet is to alert you to any shortage or surplus of cash for the day. Some businesses that do not prepare a cash sheet simply count the cash in the register at the end of the day. Without doing a reconciliation, they don't discover any shortages or overages. A shortage could be the result of theft, or it could simply result from your failure to record a special transaction, such as an expense you paid in cash.

Among the Business Tools is a cash sheet for your use. Simply plug in your daily amounts, and you will instantly see whether you have a cash shortage or surplus at the end of the day. It is an Excel 4.0 spreadsheet template, so you can use the template over and over again for your daily needs; you need to download it only once.

Bank Reconciliation

Prepare a bank reconciliation when you receive your bank statement every month. This is a very important part of your cash control procedures. It verifies the amount of cash you have in your checking account.

The cash balance in your books will never agree with the balance shown on the bank statement because of the delay in checks and deposits clearing the bank, automatic bank charges and credits you haven't recorded, and errors you may have made in your books. After preparing the bank reconciliation, you can be comfortable that the account balance shown on your books is up-to-date.

Another important reason to do a bank reconciliation is that it may uncover irregularities such as employee theft of funds.

Here are step-by-step instructions for preparing a bank reconciliation.

1. Prepare a list of deposits in transit. Compare the deposits listed on your bank statement with the bank deposits shown in your cash receipts journal. On your bank reconciliation, list any deposits that have not yet cleared the bank statement. Also, take a look at the bank reconciliation you prepared last month. Did all of last month's deposits in transit clear on this month's bank statement? If not, you should find out what happened to them.
2. Prepare a list of outstanding checks. In your cash disbursements journal, mark each check that cleared the bank statement this month. On your bank reconciliation, list all the checks from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation you prepared last month. Are there any checks that were outstanding last month that still have not cleared the bank? If so, be sure they are on your list of outstanding checks this month. If a check is several months old and still has not cleared the bank, you may want to investigate further.
3. Record any bank charges or credits. Take a close look at your bank statement. Are there any special charges made by the bank that you have not recorded in your books? If so, record them now just as you would have if you had written a check for that amount. By the same token, if there are any credits made to your account by the bank, those should be recorded as well. Post the entries to your general ledger.
4. Compute the cash balance per your books. Foot the general ledger cash account to arrive at your ending cash balance.
5. Enter bank balance on the reconciliation. At the top of the bank reconciliation, enter the ending balance from the bank statement.
6. Total the deposits in transit. Add up the deposits in transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a subtotal.
7. Total the outstanding checks. Add up the outstanding checks, and enter the total on the reconciliation.
8. Compute book balance per the reconciliation. Subtract the total outstanding checks from the subtotal in step 6 above. The result should equal the balance shown in your general ledger.

Alpha Company Bank Reconciliation March 31, 2000
Balance per bank statement		$ 4,672.98
Deposits in Transit
Date	Amount
3/30	$ 500.25
3/31	$ 1,890.33	$ 2,390.58
Subtotal		$ 7,063.56
Outstanding Checks
Check Number	Amount
1656	$ 22.50
1693	$ 150.00
1696	$ 32.00
1697	$ 1,902.00
1698	$ 1,105.80	$ 3,212.30
Balance per books		$ 3,851.26

In the above example, if the general ledger cash account does not show a balance of $3,851.26, you will need to track down the cause of the difference.

In the Business Tools area is a reconciliation spreadsheet to make bank reconciliations easy for you. It is an Excel 4.0 spreadsheet template, so you can use it as a starting point for your own bank reconciliations.

If your bank reconciliation doesn't balance, you need to find the error or errors. Here are the possible causes of a bank balance error:

• Total outstanding checks added incorrectly. Double check your addition of the total outstanding checks.
• Total deposits in transit added incorrectly. Double check your addition of deposits in transit.
• Bank balance written down incorrectly. Did you start with the correct amount at the top of your reconciliation? Double check by comparing it to the month end balance on your bank statement.
• Failed to record all items clearing the bank statement. Look at your bank statement carefully. Are there any items, such as miscellaneous bank charges or automatic deposits or withdrawals, that were not recorded in your books?
• Journals added incorrectly. Double check your addition of cash receipts and cash disbursements.
• Failed to record a check or deposit. Did you record all checks and deposits in your journals? This should have been apparent when you were preparing your lists of deposits in transit and outstanding checks.
• Incorrectly recorded an amount. Compare each item on the bank statement with your journal entry for that item. Did you enter the correct amount?

Cash Disbursements Journal

A cash disbursements journal is where you record your cash (or check) paid-out transactions. It can also be called a purchases journal or an expense journal.

There are many different types and styles of cash disbursements journals. If you will be recording expenses manually in a journal, visit an office supply store. They should have different types to choose from. Look at the column headings, and choose the journal that best meets the needs of your business. You might consider a disbursements journal that is integrated with your checkbook — this may save you some time because your journal entry is made at the same time as you write the check.

If you are using computer software, you probably won't have to decide which type of journal to use. Your program will probably have some type of disbursements journal, but may allow you to customize it based on your business needs.

If you use the accrual basis of accounting, as we recommend, you'll record expenses at the time you purchase goods or services, even if you purchase on credit.

You own a variety store. You purchase from your main supplier, on account, items totaling $7,800. Most of the purchase is inventory for resale, but also included are $100 of office supplies. Make the following entry in your purchases journal:

	Debit	Credit
Purchases	7,700
Office supplies expense	100
Accounts payable		7,800

Next month, after receiving a statement from your supplier, you write a check to settle your account. Make the following entry in your purchases journal:

	Debit	Credit
Accounts payable	7,800
Cash		7,800

Assume that your business is a retail store that sells merchandise for resale. Here is an example of a few entries in a purchases journal. The following transactions occurred:

(Note: All dollar amounts have been rounded off to the nearest dollar.)

• On February 2, you paid your electric bill of $177.
• Also on February 2, you bought merchandise inventory on account from Ash Wholesale at a cost of $9,500.
• On February 5, you spent $82 at Atkins Service Station to fill up your delivery vehicles with gas. You charge it all to the account you maintain with Atkins.
• On February 8, you write a check for $9,500 in payment of the bill you receive from Ash.
• On February 10, you write a check for $82 to Atkins Service Station to settle your account there.
• Upon completion of this journal page, you should foot all seven amount columns. Since you are using a double-entry accounting system, you can see if all entries were recorded correctly. Check to see if the sum of the debits equals the sum of the credits. Total debits: 0 + 9,582 + 9500 + 82 + 177 = 19,341. Total credits: 9,759 + 9,582 = 19,341.

PURCHASES JOURNAL FOR: FEBRUARY 2000
		Cash		Accounts Payable
Date	Descrip.	Dr.	Cr.	Dr.	Cr.	Purch. Dr.	Delivery Expense Dr.	Utilities Exp. Dr.
2	Edison Util. - electricity		177					177
2	Ash Whlsle - inventory				9,500	9,500
5	Atkins Serv. Station - gas				82		82
8	Ash Whlsle - on account		9,500	9,500
8	Atkins Serv. - on account		82	82
Totals		0	9,759	9,582	9,582	9,500	82	177

If the sum of the debit columns doesn't equal the sum of the credit columns, you have a problem that you should track down right away. You may have entered one of the amounts in the wrong column. You might have simply added incorrectly when computing the totals. It is usually easy to pinpoint the error because the debits should equal the credits for each transaction.

Your purchases journal may have many more columns than this sample because you probably will have more expense classifications.

Petty Cash Fund

Set up a petty cash fund if you need cash on hand to pay miscellaneous small expenses of your business.

If yours is a retail business with cash on hand, you probably don't need a petty cash fund. Just be sure to carefully record all cash paid out of the cash register. Preparing a cash sheet at the end of the day will help control cash paid out of the register.

A petty cash fund is set up and used as follows:

1. Start a petty cash fund by writing a check to "Petty Cash." Cash the check.
2. Physically place the cash in a petty cash drawer or petty cash box.
3. As you pay for expenses out of petty cash, keep an itemized list of each expenditure.
4. When the cash is almost depleted, add up the expenses on your itemized list.
5. Write another check to "Petty Cash" for the total of the expenses. That check should replenish the fund back to the initial balance.

You decide to set up a petty cash fund to pay small expenses that you don't pay by check. You feel a petty cash fund of $100 is necessary, so you write a $100 check payable to "Petty Cash." You physically place the $100 in a petty cash box. Make the following entry in your cash disbursements journal:

	Debit	Credit
Petty cash	100
Cash		100

Two weeks later, you review the petty cash box and find that there is $25.00 left. You add up the items listed on the expenditures list, and you are happy to find that they add up to $75.00 (25 + 75 = 100). You write a check, payable to "Petty Cash," for $75.00. The cash is placed in the petty cash box. This replenishes the fund back to $100. Using the list of petty cash expenditures as your source document, make the following entry in your cash disbursements journal:

	Debit	Credit
Office supplies	13.20
Auto expenses	39.00
Misc. labor	15.00
Misc. expenses	7.80
Cash		75.00

The petty cash drawer or box should be locked when not in use. Only one person should have access to the petty cash, so that one person is held accountable for it.

Accounts Receivable

Accounts receivable are unpaid customer invoices, and any other money owed to you by your customers. The sum of all your customer accounts receivable is listed as a current asset on your balance sheet.

You will often see Accounts Receivable abbreviated as A/R.

You should keep an accounts receivable ledger account for each customer. The accounts receivable ledger, which can also double as a customer statement, is a record of each customer's charges and payments.

When a customer purchases something, you'll first record the sale in the sales and cash receipts journal. This journal will have accounts receivable debit and credit columns. Charge sales and payments on account are entered in these two columns, respectively.

Then, each day, the credit sales recorded in the sales and cash receipts journal is posted to the appropriate customer's accounts in the accounts receivable ledger. This allows you to know not only the total amount owed to you by all credit customers, but also the total amount owed by each customer.

Entries made in the sales and cash receipts journal are also totaled at the end of the month, and the results are posted to the accounts receivable account in your general ledger. This account is your accounts receivable "control account." What "control" means is that after all your posting is completed, the total amount of customer balances in the accounts receivable ledger will be the same as the balance in the control account in the general ledger. If they aren't the same, you can tell that you made an error somewhere along the line.

If you extend credit to your customers and maintain a sales and cash receipts journal by hand, look for a journal that integrates posting to the accounts receivable ledgers with the recording of sales and cash receipts transactions. This is called a "one-write" system. It will usually save you time and cut down on posting errors. If you use a computer program, posting to the accounts receivable ledgers will occur automatically.

Accounts receivable ledger. You must maintain an accounts receivable ledger account for each customer you extend credit to. Post your sales invoice charges from the sales and cash receipts journal to the customer ledgers at the end of each day. Also, whether you use a cash register or a separate cash receipts book, be sure to post cash receipts on account to the appropriate ledgers at the end of the day.

Keep all your accounts receivable ledgers in one binder. To save paperwork, we recommend that copies of the accounts receivable ledgers also serve as the statements you mail to your customers in request for payment. If you are going to mail them out as statements, begin a new ledger sheet every month. The monthly ledger sheet should start with a balance forward, which is the ending balance from the previous month.

If your ledger sheets will not be doubling as your customer statements, you don't need to start a new sheet every month. Just keep a permanent ledger for each customer that maintains a running total of the customer balance.

For most businesses, statements should be sent once a month to all customers with an account balance. The statement should show the following:

• a beginning balance (the previous month's ending balance)
• all invoices charged during the month
• payments on account during the month
• any debit memos or credit memos
• an ending balance
• a due date

We recommend that your accounts receivable ledger double as your monthly customer statement. In the Business Tools area is a ledger statement that we have designed. Simply plug in your monthly entries, and you will have a ledger statement suitable for you, and a copy of which you can send to your customers. It is an Excel 4.0 spreadsheet template, so you can use the template over and over again; you need to download it only once.

When you mail statements to your customers every month, you should reconcile your accounts receivable ledgers with the accounts receivable control account. The control account is the total accounts receivable balance from your general ledger. The beginning accounts receivable total, plus charge sales for the month, minus payments on account for the month, should equal the ending accounts receivable total. Compare this amount to the sum of the individual customer accounts receivable ledgers. This will help you discover any errors in your customer statements before you mail them out.

You should periodically prepare an accounts receivable aging report. This is a valuable cash management tool which you will use to contact past due customers.

Accounts Payable

Accounts payable are the unpaid bills of the business; the money you owe to your suppliers and other creditors. The sum of the amounts you owe to your suppliers is listed as a current liability on your balance sheet.

You will often see Accounts Payable abbreviated as A/P.

If you use the accrual basis of accounting, as we recommend, expenses are recorded in the cash disbursements journal at the time the goods or services are purchased, even if you buy on credit. If you deal with a given supplier many times during the month, you don't have to record every purchase. You could accumulate all bills for the month from that supplier, then record one transaction in the purchases journal at the end of the month.

You should keep an accounts payable ledger account for each supplier. Expenses from the cash disbursements journal are, at the end of each day, posted to the appropriate accounts payable ledger. The accounts payable ledger is a record of what you owe each vendor.

The general ledger contains an accounts payable account, which is your accounts payable control account. The cash disbursements journal has accounts payable credit and debit columns. Credit purchases and payments on account are entered in these two columns, respectively. At the end of the month they are totaled and posted to the control account in the general ledger.

Accounts payable ledgers. Accounts payable ledgers will help you control your expenditures and payables. If you maintain accurate payable ledgers, it will be easy for you to double check the bills you get from your suppliers.

At the end of the month, reconcile your accounts payable ledgers with the accounts payable control account. The control account is the total accounts payable balance from your general ledger. The beginning accounts payable total, plus purchases on account during the month, minus payments on account during the month, should equal the ending accounts payable total. Compare this amount to the sum of the individual accounts payable ledgers. This will help you discover any errors you made in recording your payables. A reconciliation might also help you catch any errors on vendor bills.

An accounts payable aging report is a good cash management tool that should be prepared periodically. It will help you plan the timing and amount of your cash disbursements.

General Ledger

The general ledger is a permanent summary of all your supporting journals, such as the sales and cash receipts journal and the cash disbursements journal. Your financial statements are built from the general ledger.

For each account title shown on your sales and cash receipts journal columns and your cash disbursements journal columns, there is a general ledger account. There are also separate general ledger accounts for miscellaneous items that don't have their own column in the journals, but are entered in a "miscellaneous" column.

For example, Cash, Accounts receivable, Accounts payable, Sales, Purchases, Telephone expense, and Owners equity are all examples of general ledger accounts. There is a page reserved in the general ledger for each general ledger account.

The individual entries in the general ledger are always from the total columns of your supporting journals. When all journal entries are posted, you can arrive at the ending balance for each account. The sum of all general ledger debit balances should always equal the sum of all general ledger credit balances.

Disclaimer: The material on this site is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Copyright © 2008 U.S. Chamber of Commerce 1615 H St NW Washington DC 20062-2000 All Rights Reserved