Bookkeeping

Very small businesses are not required to keep their financial records using formal bookkeeping practices, but as a business grows in number of financial transactions per month and in the complexity of the business operations, it becomes increasingly important to use a formal bookkeeping system. 

Who should keep the books? 

The owner of a small business may choose to be their own bookkeeper, or to hire a trained bookkeeper. As a business grows in size and complexity it becomes necessary for the owner to hire a bookkeeper. The bookkeeper’s job is to accurately enter past financial transactions into a formal bookkeeping system. The owner needs to be able to focus on how to take historic information from the bookkeeping system and use it to analyze past performance and make decisions about the future direction of the business. 

Bookkeepers may have formal or informal training, and vary greatly in experience and competence. If a business owner does not have a basic understanding of what to expect from a bookkeeper and how to supervise a bookkeeper, they can end up paying a lot of money for bookkeeping that is not actually useful, or worse, they may become victims of embezzlement. Doing your own bookkeeping during the early stages of your business may be a great way to learn basic bookkeeping and prepare yourself to later hire and supervise a bookkeeper. 

Bookkeeping is Entering Data According to a Set of Standard Rules

It is easy to be intimidated by the complexity of bookkeeping - people get two-year degrees in bookkeeping and four-year degrees in accounting – but the basics are actually very simple to understand. 

All of bookkeeping and accounting comes down to a few principles and definitions, and these are employed everywhere in the world. If you understand these basics, you will quickly be able to use most bookkeeping programs. 

Foundational principles

Accounting Entity One of the most fundamental accounting principles is that an accounting is for a single entity only. This means that you cannot have a bookkeeping system that accounts for two businesses that have different ownership, and you cannot have a bookkeeping system that accounts for household income and expenses and business income and expenses in the same accounting. This is one of the reasons it is important to have separate business and personal bank accounts. 

Reporting Period / Accounting Period Another basic accounting principle is that income and expenses are reported for standard periods of time, usually a month, a quarter, and a year. At the end of each accounting year, the income and expenses are re-set to zero. Reports should always be run for standard accounting periods, a month, quarter, or year. 

Double Entry A third foundational principle is that there are two aspects to every transaction; this is called double-entry accounting, because each entry in the system must have two sides. The entire bookkeeping system is tied together with one simple mathematical formula, and the way mathematical formulas work is that if you do something to one side of the equation you have to do something of equal value to the other side of the equation or the equation will not be in balance. You will see the term “balance” used over and over again in double-entry bookkeeping. Think of a see-saw. Every transaction in your bookkeeping system first affects one side of the see-saw and then an equal amount must go on the other side of the see-saw to re-balance it. Everything you enter into your bookkeeping system must have two sides. Usually you will know one of the effects immediately - cash went up or down, that is the first entry - then you have to figure out the second entry - that second entry tells you why cash went up or down. For that you need to know a few basic definitions. 

Basic Definitions

Most bookkeeping entries are explained by six definitions. Five of them are really easy, and two take a little effort to understand. Here they are: 

Assets 

There are a few different types of assets:

1. Cash;
2. Amounts owed to the business;
3. Property used in the business, and expected to benefit the business beyond the current accounting period. There are a few different types of property.  
   
   1. Supplies and Inventory are expected to be used up entirely in the near future – 6-18 months. 
   2. Depreciable property is expected to last two or more years and to gradually decline in value over time.  
   3. Non-depreciable property, like land, is considered eternal. 

Depreciable assets are things that have lasting value to the business and have an “ascertainable useful life in excess of one year.” 

Assets are not expensed (deducted) when purchased. Instead you take a “depreciation deduction” using special forms that are part of your tax return.

Liabilities 

Liabilities are amounts owed by the business, if the obligation to pay is certain, and the amount owed is known or can be reasonably estimated. This means that you do not report liabilities if it is not a certain legal fact that you owe the sum, or if you cannot reasonably estimate the amount owed. 

Income 

There are three types of business income: 

1. Ordinary income from sales of goods and services in the ordinary course of business;
2. Capital gains income from the occasional sale of property that has been used in the business;
3. Extraordinary income paid to the business for events unrelated to its normal activities or asset sales - this is usually insurance proceeds or the settlement of a lawsuit. 

Expenses 

There are two types of business expenses: 

1. Ordinary expenses incurred to conduct the regular activities of the business;
2. Extraordinary expenses or losses incurred due to events unrelated to normal business activities, these may be unusual fines or penalties, or amounts to settle a lawsuit, or losses associated with a disaster.  

Net Income (or Loss) 

Total income less total expenses for the accounting period (a month, a quarter, or a year). If the amount is positive it is called Net Income. If it is negative it is called Net Loss.  

Equity  

Equity is the net total value of the owner’s interest in the business. If there is only one owner then all of the equity in the business belongs to the one owner. If there is more than one owner, then the total equity is the sum of each of their total interests in the business. 

Equity can be calculated two ways: 

1. The difference between assets and liabilities. Equity is positive if assets are greater than liabilities and it is negative if liabilities are greater than assets. 
2. The sum, for the entire history of the business, of all the investments the owners have made into the business, less all of the draws they have taken from the business, plus or minus the net income or loss from every year of the business. 

For most people, the most difficult thing to understand when learning basic bookkeeping is how to record amounts that owners contribute to or withdraw from the business. That is because those amounts directly affect equity, and equity is the hardest of the six definitions to understand. 

The second hardest thing for most people to understand is when something is an asset and when it is an expense, and why the difference matters. The easy examples: a tractor is an asset, and tractor fuel is an expense. The harder examples take up volumes of accounting textbooks and Internal Revenue Code. It matters because if you treat assets as expenses then you will not have a permanent list of the assets that are used in your business year after year. This will make it hard to comply with income and property tax filing requirements, obtain credit, or plan for maintenance and future purchases. 

The chart of accounts is the backbone of the bookkeeping system. Every double-entry bookkeeping system is based on a chart of accounts. It lists all the proper and required types of accounts in their correct order. If your books don’t make sense to you, often the problem is that they have been set up using a chart of accounts that is not appropriate for your business type. This is often the case when a farm or ranch business uses the default chart of accounts offered by Intuit QuickBooks® or other bookkeeping programs. 

The California FarmLink Model Chart of Accounts is designed to ensure that your books reflect your operation.

For a new set up: If you are setting up a new bookkeeping system we highly recommend that you use the FarmLink Model Chart of Accounts instead of any standard chart of accounts provided in QuickBooks or by any other bookkeeping system that is not designed for agricultural operations. If you go this route - read CoA.3 Importing the California FarmLink Model Chart of Accounts before you do any set-up in Quickbooks. As soon as you start setting up a new company in Quickbooks® it will add accounts and complicate your set up using the Model Chart of Accounts. 

There are several versions of the FarmLink Model Chart of Accounts. Click on the one that best describes your business. This list shows options in order of complexity, from the simplest type of crop or livestock operations to the most complex. 

1. Crops no VA Model CoA for farms without value added production or livestock

2. Crops with VA Model CoA for farms with value added production

3. Crops Livestock VA for operations with crops and livestock and value added production

4. Livestock Live Sales Only Model CoA for livestock operations with live sales only

5. Livestock Only with VA Model CoA for livestock operations selling products 

6. Nursery Model CoA for nursery operations only

7. Advanced Allocation Model CoA  - For advanced users only, for an operation with detailed payroll records and the ability to allocate payroll across production, marketing, value-added, other, and administrative activities. Do not use this version unless you have advanced ability to track payroll, allocate using a spreadsheet, and create and enter regular journal entries.

As you review the model chart of accounts you will notice a column for the account number, another for the account name, and two more for account type and account detail. These will all import into Quickbooks Online. There are two more columns which will not import - one cross references balance sheet accounts to additional information in the Supplemental Learning Center, and the other has short additional explanations about the account, or about what types of accounts are grouped together, and where you may add additional accounts if needed. You can also find the information in those two columns in CoA.2 Annotated Chart of Accounts. Be sure to keep a copy of the chart of accounts you downloaded, or of CoA.2 Annotated Chart of Accounts for reference, as you learn how to navigate your new chart of accounts. 

The account types and account detail types are how Quickbooks keeps similar accounts grouped together for presentation. 

Account numbers are a more standard way of keeping different types of accounts together and ensuring they present in the correct order on the balance sheet and income statement reports. The basic numeric structure is standard across all accounting platforms (except Quickbooks). Using account numbers will give you the most flexibility to move from one type of accounting software to another, and once you get used to the numbering system it will also help you to understand your accounting structure more deeply.

In the California FarmLink Model Chart of Accounts, certain number series are reserved for certain types of operations; for example, expense accounts in the 5050 series are for livestock-related expenses. If you choose a model chart of accounts with no livestock you will see that your expense accounts may skip from 5040 to 5060. There are also many places throughout the model chart of accounts that are designated as places where you can add additional accounts if you feel they are needed. We recommend that you do not add new accounts using any number series that is not already in your model chart of accounts. That way if your business ever does grow or change to take on new activities - such as livestock - you will be able to return to the FarmLink Model Chart of Accounts and add the recommended accounts in the recommended place in your chart of accounts. 

Please read CoA.2 Annotated Chart of Accounts for explanations of the main types of accounts and the number series used.

Step 1: From your Home page in QBO, open the Chart of Accounts

1. Click the Accounting center from the oval tab at the top of the screen or from “All apps” in the left navigation bar.
2. Select Chart of Accounts.‍
   
   1. Tip: Click the hamburger icon (three lines) at the top left by “All Apps” to expand your screen space.

Step 2: Inactivate the Default Accounts

When you create your QBO account, a default Chart of Accounts (CoA) is created by QBO. Sometimes it is only a few accounts that are required by QBO; sometimes it is a whole set of accounts QBO thinks is right for your business. 

Before you import FarmLink's Model CoA you must remove the existing accounts by inactivating them.

Note: You cannot fully delete accounts in QBO — they become inactive instead. Inactive accounts can be reactivated later if needed. Some QBO default accounts are required and cannot be inactivated.

1. Click the gear icon (top of account list on the right) and increase the Page Size to show all accounts on one page. If you can click “Next  >” under the gear icon you have more pages of accounts; if it is greyed out, all accounts are on this page.
2. Inactivate subaccounts first — QBO requires this before you can inactivate a parent account.
   
   1. Scroll through your accounts and look for indented accounts — those are subaccounts. You may also have the option to filter your CoA to show only the subaccounts. Above the list of accounts there is a “Batch action” box and two filter boxes. Choose the dropdown on the box that says “All” and select “subaccounts only”.
   2. Check the boxes on the left side of all subaccounts, or the box at the very top of the list to select all if you only have subaccounts showing.
   3. Return to the top of the accounts list and click the green Batch actions box above the checkboxes. Select Make inactive. Because you have not entered any transactions in QBO you can select Make inactive in the pop-up message.
3. Once subaccounts are inactivated, select all remaining accounts using the checkbox at the top of the list, just to the left of the Name column. This will check the boxes for all accounts.
4. Once again click the green Batch actions box above the checkboxes and select Make inactive. 
   
   1. This time you will receive a message that some accounts weren’t deactivated. At this writing, there are seven accounts: Opening balance equity, Retained earnings, Services, Uncategorized Asset, Uncategorized Expense, Uncategorized Income, and Undeposited Funds. These are accounts that are required by QBO.

Step 3: Enable Account Numbers

Account numbers allow you to reference an account quickly and  let you control the order accounts appear in reports. Without them, accounts display alphabetically, with them they appear in meaningful groupings. One of the most significant problems with the QBO default chart of accounts is it fails to present accounts in a meaningful and standard order. Refer to the “Annotated Model Chart of Accounts” resource for an explanation of the numbering system used in the California FarmLink Model Chart of Accounts. 

1. Click the gear icon (top right corner).
2. Go to Account and settings under the Your Company column.
3. Go to the Advanced tab.
4. Find the Chart of Accounts section and click the pencil icon or the word Edit.
5. Enable Account Numbers.
6. If you want account numbers to appear on reports, select Show Account Numbers.
7. Select Save and close the screen with the X in the top right corner.
   
   1. Now you will see a Number column in your CoA.

Step 4: Import the California FarmLink Model CoA

Select the version of the California FarmLink Model CoA that best fits your company, and download it to your computer desktop before starting. The model CoA options can be found with the other CA FarmLink bookkeeping resources. 

1. Click the green NEW account button and select Import from the dropdown.
2. Drag and drop or choose select files using the version of the California FarmLink Model CoA that you downloaded. 
3. Click the green NEXT button and the mapping screen will appear.
   
   1. The spreadsheet is set up to map automatically.
4. Click the green NEXT button.
5. All accounts from the spreadsheet will appear.
   
   1. The boxes on the left can be checked to remove any accounts from the import. However, we recommend importing the entire CoA and doing any edits in QBO.
   2. To the right are Actions that you can take - adding, deleting, copying, creating subaccounts. Once again, we recommend not doing so at this point.
6. Click the green Finish button.

Note: You will be returned to the CoA screen and will see a message noting the number of accounts imported and if some did not. If any accounts fail to import, it is likely because they already exist in your QBO CoA (e.g., Opening Balance Equity, Retained Earnings).

Step 5: Review Your New Chart of Accounts

1. Scroll through your new CoA or select Run Report (top right corner) to review all accounts. You can also export a csv list or a pdf; see the icons at the top of the ACTION column.
2. If you are a partnership or a mult-member LLC, edit the names of the 35X0 Capital Contribution accounts and the 36X0 Draw accounts by replacing Owner # with the owner’s name. In the CoA list in QBO, select Edit from the dropdown menu in the Action column on the right side of the list. Edit the name and click the green Save button at the bottom.
   
   1. If you are a partnership with more than two partners, or an LLC with more than two members you will need to add additional equity accounts for the additional owners. Follow the same numbering convention as used in the first set of owner equity accounts where X is the number of the 35X0 Capital Contribution - Owner X and 36X0 Draw - Owner X. 
3. The accounts that already existed in QBO before your import will not have account numbers. Edit the account numbers to match those in the Model CoA.
4. After your import, you will often find an account called Billable Expense Income has been created. You can delete it.
5. You have the option to edit the account number and name of multiple accounts by using the Batch edit tool. This is a pencil icon that says “Batch edit” in green on the right side above the ACTION column. 
6. You will see many income and expense accounts that do not (yet) apply to your business. Refer to the Annotated Model Chart of Accounts document for information on the numbering system and reserved “Open/Other” accounts. Inactivate accounts that are not yet needed. See Step 2 above, checking only the boxes of those accounts you wish to inactivate. As your business grows and changes these accounts may become relevant. The California FarmLink Model Chart of Accounts is designed to give you lots of room to grow, and to ensure that as you grow your chart of accounts stays well organized and consistent with best practices, allowing you to have meaningful reports at every stage of your business. 

Step 6: Dive in! 

1. Begin entering data and running reports — this is the best way to learn how your CoA works for your business. Refer to the Annotated Model Chart of Accounts document for additional information on the purpose of different accounts and the structure of the numbering system. 
2. Refine your CoA as needed over time, following the numbering system described in the Annotated Model Chart of Accounts document. There is plenty of room for you to add new accounts as needed.

Remember: This is a model template — you will likely adjust it to fit your specific business. Having this standard setup makes your accounts and reports easier to understand for accountants and other service providers.

Access the Annotate Model Chart of Accounts here (PDF)

Step 1: From your Home page in QBO, open the Chart of Accounts

1. Click the Accounting center from the oval tab at the top of the screen or from “All apps” in the left navigation bar.
2. Select Chart of Accounts.‍
   
   1. Tip: Click the hamburger icon (three lines) at the top left by “All Apps” to expand your screen space.‍
3. If you do not see the Number column, you need to enable account numbers for your CoA. See Step 3: Enable Account Numbers in CoA.3 below.

Step 2: Add accounts

1. Click the green New account button at the top right corner
2. Enter the Account name and the appropriate account number. Refer to the Annotated Model Chart of Accounts document for information on the numbering system and reserved “Open/Other” accounts
3. You must also enter a Detail type. This is theoretically used to connect to tax software; however, it is usually not helpful. We suggest you choose the detail type based on a similar account in the Model CoA.
4. If you would like the account to be a subaccount of another, check the Make this a subaccount box and choose the correct Parent account.
5. The Description is to help you or anyone else who will be looking at the accounts; however, it is not necessary.
6. Some accounts will give you the option to set an Opening balance. Do NOT do so. Leave it blank.

Step 3: Inactivate multiple accounts in a batch

Note: You cannot fully delete accounts in QBO — they become inactive instead. Inactive accounts can be reactivated later if needed. Some QBO default accounts are required and cannot be inactivated. Be very careful about Balance Sheet accounts (Banks, Assets, Liabilities, Equities). Do NOT inactivate a Balance Sheet account with a balance! QBO will create an offsetting transaction in the Opening Balance Equity account.

1. Click the gear icon (top of account list on the right) and increase the Page Size to show all accounts on one page. If you can click “Next  >” under the gear icon you have more pages of accounts; if it is greyed out, all accounts are on this page.
2. Above the list of accounts there is a “Batch action” box and two filter boxes. The dropdown list on the box that says “All” has several options that can narrow the accounts that are shown. The box that says “Filter by name or number” is helpful if you want to work with several accounts that contain the same word or numbers.
3. If any account you would like to inactivate has subaccounts you must inactivate subaccounts first — QBO requires this before you can inactivate a parent account.
   
   1. You may use the filter mentioned in 3.2. to select “subaccounts only”. If you don’t have that option, scroll through your accounts and look for indented accounts — those are subaccounts.
   2. Check the boxes on the left side of all subaccounts you would like to inactivate. If you would like to inactivate all the accounts that are displayed, use the checkbox at the top of the list, just to the left of the Number column to select all accounts.
   3. Return to the top of the accounts list and click the green Batch Actions box above the checkboxes. Select Make inactive. 
4. Once subaccounts are inactivated, set the filter back to “All” or whatever filtered group you prefer. Check the boxes on the left side of all subaccounts you would like to inactivate or use the checkbox at the top of the list, just to the left of the Number column, to select all accounts.
5. Once again click the green Batch Actions box above the checkboxes and select Make inactive. 

Step 4: Edit individual accounts

1. You have the option to edit accounts individually using the dropdown list in the ACTION column on the right.
   
   1. You can Edit, which will display the same screen that you see when you add an account. See Step 2.
   2. You can Create a subaccount.‍
   3. You can Make the account inactive.

Step 5: Batch Edit

1. You have the option to edit the account number and name of multiple accounts by using the Batch edit tool. This is a pencil icon that says “Batch edit” in green on the right side above the ACTION column. 
2. When you have completed your edits, select the green Save button.

Step 1: From your Home page in QBO, open the Chart of Accounts

1. Click the Accounting center from the oval tab at the top of the screen or from “All apps” in the left navigation bar.
2. Select Chart of Accounts.‍
   
   1. Tip: Click the hamburger icon (three lines) at the top left by “All Apps” to expand your screen space.

Step 2: Inactivate the Default Accounts

When you create your QBO account, a default Chart of Accounts (CoA) is created by QBO. Sometimes it is only a few accounts that are required by QBO; sometimes it is a whole set of accounts QBO thinks is right for your business. 

Before you import FarmLink's Model CoA you must remove the existing accounts by inactivating them.

Note: You cannot fully delete accounts in QBO — they become inactive instead. Inactive accounts can be reactivated later if needed. Some QBO default accounts are required and cannot be inactivated.

1. Click the gear icon (top of account list on the right) and increase the Page Size to show all accounts on one page. If you can click “Next  >” under the gear icon you have more pages of accounts; if it is greyed out, all accounts are on this page.
2. Inactivate subaccounts first — QBO requires this before you can inactivate a parent account.
   
   1. Scroll through your accounts and look for indented accounts — those are subaccounts. You may also have the option to filter your CoA to show only the subaccounts. Above the list of accounts there is a “Batch action” box and two filter boxes. Choose the dropdown on the box that says “All” and select “subaccounts only”.
   2. Check the boxes on the left side of all subaccounts, or the box at the very top of the list to select all if you only have subaccounts showing.
   3. Return to the top of the accounts list and click the green Batch actions box above the checkboxes. Select Make inactive. Because you have not entered any transactions in QBO you can select Make inactive in the pop-up message.
3. Once subaccounts are inactivated, select all remaining accounts using the checkbox at the top of the list, just to the left of the Name column. This will check the boxes for all accounts.
4. Once again click the green Batch actions box above the checkboxes and select Make inactive. 
   
   1. This time you will receive a message that some accounts weren’t deactivated. At this writing, there are seven accounts: Opening balance equity, Retained earnings, Services, Uncategorized Asset, Uncategorized Expense, Uncategorized Income, and Undeposited Funds. These are accounts that are required by QBO.

Step 3: Enable Account Numbers

Account numbers allow you to reference an account quickly and  let you control the order accounts appear in reports. Without them, accounts display alphabetically, with them they appear in meaningful groupings. One of the most significant problems with the QBO default chart of accounts is it fails to present accounts in a meaningful and standard order. Refer to the “Annotated Model Chart of Accounts” resource for an explanation of the numbering system used in the California FarmLink Model Chart of Accounts. 

1. Click the gear icon (top right corner).
2. Go to Account and settings under the Your Company column.
3. Go to the Advanced tab.
4. Find the Chart of Accounts section and click the pencil icon or the word Edit.
5. Enable Account Numbers.
6. If you want account numbers to appear on reports, select Show Account Numbers.
7. Select Save and close the screen with the X in the top right corner.
   
   1. Now you will see a Number column in your CoA.

Step 4: Import the California FarmLink Model CoA

Select the version of the California FarmLink Model CoA that best fits your company, and download it to your computer desktop before starting. The model CoA options can be found with the other CA FarmLink bookkeeping resources. 

1. Click the green NEW account button and select Import from the dropdown.
2. Drag and drop or choose select files using the version of the California FarmLink Model CoA that you downloaded. 
3. Click the green NEXT button and the mapping screen will appear.
   
   1. The spreadsheet is set up to map automatically.
4. Click the green NEXT button.
5. All accounts from the spreadsheet will appear.
   
   1. The boxes on the left can be checked to remove any accounts from the import. However, we recommend importing the entire CoA and doing any edits in QBO.
   2. To the right are Actions that you can take - adding, deleting, copying, creating subaccounts. Once again, we recommend not doing so at this point.
6. Click the green Finish button.

Note: You will be returned to the CoA screen and will see a message noting the number of accounts imported and if some did not. If any accounts fail to import, it is likely because they already exist in your QBO CoA (e.g., Opening Balance Equity, Retained Earnings).

Step 5: Review Your New Chart of Accounts

1. Scroll through your new CoA or select Run Report (top right corner) to review all accounts. You can also export a csv list or a pdf; see the icons at the top of the ACTION column.
2. If you are a partnership or a mult-member LLC, edit the names of the 35X0 Capital Contribution accounts and the 36X0 Draw accounts by replacing Owner # with the owner’s name. In the CoA list in QBO, select Edit from the dropdown menu in the Action column on the right side of the list. Edit the name and click the green Save button at the bottom.
   
   1. If you are a partnership with more than two partners, or an LLC with more than two members you will need to add additional equity accounts for the additional owners. Follow the same numbering convention as used in the first set of owner equity accounts where X is the number of the 35X0 Capital Contribution - Owner X and 36X0 Draw - Owner X. 
3. The accounts that already existed in QBO before your import will not have account numbers. Edit the account numbers to match those in the Model CoA.
4. After your import, you will often find an account called Billable Expense Income has been created. You can delete it.
5. You have the option to edit the account number and name of multiple accounts by using the Batch edit tool. This is a pencil icon that says “Batch edit” in green on the right side above the ACTION column. 
6. You will see many income and expense accounts that do not (yet) apply to your business. Refer to the Annotated Model Chart of Accounts document for information on the numbering system and reserved “Open/Other” accounts. Inactivate accounts that are not yet needed. See Step 2 above, checking only the boxes of those accounts you wish to inactivate. As your business grows and changes these accounts may become relevant. The California FarmLink Model Chart of Accounts is designed to give you lots of room to grow, and to ensure that as you grow your chart of accounts stays well organized and consistent with best practices, allowing you to have meaningful reports at every stage of your business. 

Step 6: Dive in! 

1. Begin entering data and running reports — this is the best way to learn how your CoA works for your business. Refer to the Annotated Model Chart of Accounts document for additional information on the purpose of different accounts and the structure of the numbering system. 
2. Refine your CoA as needed over time, following the numbering system described in the Annotated Model Chart of Accounts document. There is plenty of room for you to add new accounts as needed.

Remember: This is a model template — you will likely adjust it to fit your specific business. Having this standard setup makes your accounts and reports easier to understand for accountants and other service providers.

Cash may still play a role in your business.

• Cash sales at a farmers’ market or a farmstand
• Miscellaneous cash sales to other farmers such as for used equipment
• Paying workers in cash, making workers cash loans against future pay 

There are smart ways to use cash in your business and ways that can get you in trouble. 

Things that will get you in trouble: 

• If you do not report cash income but use the cash to pay for expenses which you do report your financial information will be inaccurate, and a reader who understands your business will be able to see that your income is under-stated. This will make it difficult to get a loan.
•  If discovered, under-reporting income on your tax returns could subject you to underpayment and accuracy-related penalties, and would give the IRS reason to audit your tax returns going back as many years as you have been in business (if there were no evidence of deliberate under-reporting of income they would only be able to go back three years). 
• Using cash without a good method to ensure that the cash is all accurately reported in your bookkeeping system will cause your records to be incorrect even if it was not your intention. You may accidentally over- or under-report income and expenses. You will have difficulty explaining your business to yourself, any advisers who try to help you, a loan officer who wants to make you a loan, or an auditor who may think you have deliberately under-reported taxable income. 

Good methods for ensuring that cash used in your business is accurately reported

For cash receipts 

1. Get an envelope, count cash, write down the total on the envelope, put cash in the envelope.
2. Prepare a bank deposit
3. Deposit cash in a business bank and get a deposit receipt, check the deposit receipt total is the same as the total on the envelope. Re-count with the banker if the totals are not the same. Write the corrected total on the envelope if needed. Put the bank deposit receipt in the envelope.  
4. Make any additional notes about sales on the envelope and give the envelope with the deposit receipt to your bookkeeper.
5. Review the books each month and pay particular attention to cash receipts being recorded correctly.

For cash paid out 

1. Have a set “petty cash / cash on hand” amount - say $100
2. Put $100 in a coffee can or a zippered cash bag - this is called “petty cash”
3. Take cash needed from petty cash - say $20
4. Spend the cash as needed and get a receipt
5. Return the change and the receipt to the petty cash location
6. At least once a month: 
   
   1. Reconcile the coffee can/cash bag once a week (or month) by adding all the receipts and all the change. The total of all the receipts plus all the change should equal the original total of cash in the coffee can or cash bag. If it does not, you are missing a receipt. 
      
      1. Total of all bills and change equals $49.75. Total of all receipts equals $20.25. Total cash plus receipts equals $70.00. The total should be $100 - you are missing receipts totalling $30.00.  
      2. You can use a hand-written note to re-create the missing receipt – something like "Bought extra tomato starts from River Farm $30.00, no receipt.” 
      3. Now if you re-add all receipts and all cash you will total $100.00
   2. Give all the receipts to the bookkeeper 
   3. Bring the cash in the coffee can or cash bag back to the set amount
      
      1. Determine how much cash to add by subtracting the total cash remaining in the coffee can/cash bag from the set amount: $100.00 original amount, less $49.75 remaining = $50.25 needed to restore the original balance. This should also be the same as the total of all the receipts.
      2. Decide the source of the cash you will use to restore the balance:
         
         1. Bank: Write a check for “cash” for the amount needed and cash it at your bank. Put the needed amount of cash back in the coffee can or envelope. Your bookkeeper will know this is the amount needed to restore the petty cash account. 
         2. Cash Sales: See instructions for cash sales above. After you have added total cash sales and written the total for cash sales on the envelope, write “Less: Petty Cash” and the amount taken out of the deposit for petty cash. Subtract petty cash from total sales to get the amount of your deposit to the bank. Write this total on the envelope. Prepare the bank deposit and follow the instructions above for cash sales. 

The step-by-step instructions for creating a list of depreciable assets are included in the workbook.

Access FarmLink Model Asset List

The step-by-step instructions for creating a list of depreciable assets are included in the workbook.

Access FarmLink Model Asset List

‍Authored by Frances Andrews

Step 1: From your Home page in QBO, open the Reports page

1. Click Reports in the left navigation bar.
2. Select Standard Reports.‍
   
   1. Tip: Click the hamburger icon (three lines) at the top left by “Reports & Analytics” to expand your screen space.‍
3. Select the Accounts receivable aging summary report. You will find it in the “Favorites” section at the top and in the “Who owes you” section. You can also use the search bar at the top of the page. Click on the report to run it.
   
   1. Other useful reports to review in the “Who owes you” section are the Accounts receivable aging detail and the Open Invoices reports.

Step 2: Review the Accounts Receivable reports

1. Every number in the report is a hyperlink. You can click on it to see the details and then you can click any invoice listed to see the invoice.

‍Authored by Frances Andrews

Step 1: From your Home page in QBO, open the Reports page

1. Click Reports in the left navigation bar.
2. Select Standard Reports.‍
   
   1. Tip: Click the hamburger icon (three lines) at the top left by “Reports & Analytics” to expand your screen space.‍
3. Select the Accounts payable aging summary report. You will find it in the “What you owe” section. If you click on the star to the right of the report name it will also show up in the “Favorites” section at the top of the page. You can also use the search bar at the top of the page. Click on the report to run it.
   
   1. Other useful reports in the “What you owe” section are the Accounts payable aging detail and the Unpaid bills reports.

Step 2: Review the Accounts Payable reports

1. Every number in the report is a hyperlink. You can click on it to see the details and then you can click any bill listed to see the bill.