Chapter 24

The Ten (Plus One) Most Important Accounts for Any Bookkeeper

In This Chapter

Thinking about key asset accounts

Understanding critical liability accounts

Taking in money

Monitoring costs and expenses

Tracking the owner’s share

Each and every account has its purpose in bookkeeping, but all accounts certainly aren’t created equal. For most companies, some accounts are more essential than others, so in case you’re having trouble knowing where to start your account setup and what’s necessary, this chapter looks at the top must-have accounts for bookkeepers.

Cash

All your business transactions pass through the Cash account, which is so important that you actually need two journals, Cash Receipts and Cash Disbursements, to track the activity. (I discuss these journals at length in Chapter 5.) It’s your responsibility as the bookkeeper to be sure that all cash — whether it’s coming into the business or being sent out — is handled and recorded properly in the Cash account.

Accounts Receivable

If your company sells its products or services to customers on store credit, you definitely need an Accounts Receivable account. This account is where you track all money due from customers. Keeping Accounts Receivable up-to-date is critical to be sure that you send timely and accurate bills to customers. I talk more about Accounts Receivable processes in Chapter 9.

Inventory

Every company must have products to sell. Those money-making products must be carefully accounted for and tracked because it’s the only way a business knows what it has on hand to sell. As the bookkeeper, you contribute to this process by keeping accurate inventory records in an Inventory account. The numbers you have in your books are periodically tested by doing physical counts of the inventory on hand. You can find more about how to manage inventory and Inventory accounts in Chapter 8.

Accounts Payable

No one likes to send money out of the business, but you can ease the pain and strain by tracking and paying bills in your Accounts Payable account. You certainly don’t want to pay anyone twice, but you also want to be sure you pay bills on time, or else your company may no longer get the supplies, inventory, or other things needed to operate the business. Suppliers often penalize late-paying companies by cutting them off or putting them on cash-only accounts. On the flip side, if you pay your bills early, you may be able to get discounts and save money with suppliers, so the early bird definitely gets the worm. For more on the Accounts Payable account, check out Chapter 8.

Loans Payable

Inevitably, your company will need to purchase major items such as equipment, vehicles, and furniture at some point. Unfortunately, you may find that you don’t have the money to pay for such purchases. The solution is to take on long-term loans to be paid over more than a 12-month period. The Loans Payable account allows you to monitor the activity on these loans in order to get and keep the best rates and make all loan payments on time and accurately. I talk more about the Loans Payable account in Chapter 13.

Sales

No business can operate without taking in cash, mostly through sales of the company’s products or services. The Sales account is where you track all incoming revenue collected from these sales. Recording sales in a timely and accurate manner is a critical job because otherwise you can’t know how much revenue has been collected every day. To find out more about sales and the Sales account, see Chapter 9.

Purchases

Purchases are unavoidable. In order to have a tangible product to sell, your company has to either manufacture the product, in which case you have to purchase raw materials, or purchase a finished product from a supplier. In the Purchases account, you track the purchases of any raw materials or finished goods. The Purchases account is a key component in calculating Cost of Goods Sold, which you subtract from Sales to find your company’s gross profit. I cover more about the Purchases account in Chapter 8.

Payroll Expenses

You must pay employees to get them to stay around; that’s a fact of business. No matter how much you beg, few people want to work for nothing. To keep up with what is for many businesses their biggest expense, you track all money paid to employees in the Payroll Expenses account. Accurate maintenance of this account is essential because it ensures that all governmental reports are filed and payroll taxes are paid. And if you don’t take care of these responsibilities to the government, you’ll find yourself in some serious hot water. Chapters 10, 11, and 20 have more details on payroll obligations and the Payroll Expenses account.

Office Expenses

One key expense that can drain a company’s profits is office expenses. From paper, pens, and paper clips to expenses related to office machinery, these expenses tend to creep up if you don’t carefully monitor them in the Office Expenses account. I talk more about the Office Expenses account, as well as internal controls that you can put into place to keep costs down, in Chapter 7.

Owners’ Equity

Accounts related to owners’ equity, which is the amount each owner puts into the business, vary depending on the type of business for which you keep the books. Many small businesses are owned by one person or a group of partners; they’re not incorporated, so no stock shares exist to divide up ownership. Instead, money put into the business by each of the owners is tracked in Capital accounts, and any money taken out of the business by the owners appears in Drawing accounts. In order to be fair to all owners, you must carefully track all Owners’ Equity accounts. Head to Chapter 21 for more about business structures and types of ownership; I discuss Owners’ Equity accounts in Chapter 18.

Retained Earnings

The Retained Earnings account tracks any of the company’s profits that are reinvested for growing the company and not paid out to company owners. This account is cumulative, which means it shows a running total of earnings that have been retained since the company opened its doors. Although managing this account doesn’t take you a lot of time, the ongoing accuracy of the Retained Earnings account is important to investors and lenders who want to track how well the company is doing. I talk more about retained earnings in Chapter 18.