etting Up an Accounting System
Throwing all your receipts in a shoebox is just a start. To
truly track your business's finances, you need to incorporate all the data from
those receipts and from your inventory and customer management systems into some
sort of an accounting system.
This chapter isn't the place to go into all that's involved in
setting up a detailed small business accounting system; lots of other books and
online resources are more appropriate to the task. We can, however, take a look
at what you need to track to make your accounting system work.
Tracking Your Business
Activity
All accounting systems track basic types of activities:
revenues and expenses. Revenues are the sales you
make to your eBay customers. Expenses are the
costs you incur in the running of your businessthe inventory you have to
purchase, as well as all those other things you need to buy to make your
business run.
In accounting terms, the money you take in creates a credit on your books. The money you spend creates a
debit. When your credits exceed your debits,
you're making a profit (or at least generating positive cash flow). When your
debits exceed your credits, your business is losing money. Obviously, the former
position is preferable.
To make your accounting system work, you have to enter each and
every financial activity of your business. Purchase some merchandise for sale,
enter it in the books. Make a sale, enter it in the books. Buy some supplies,
enter them in the books. You get the idea.
Note
Confused? Brush up on these essential accounting concepts in Appendix A, "Accounting
Basics."
At regular intervalstypically at the end of each monthyou add
up all the credits and debits (after putting them in the proper slots) and take
a snapshot as to how your business is doing. These snapshots are the
financial statements you use to measure the financial condition of your
business.
Key Financial Statements
There are two key financial statements that you should prepare
at the end of each month. They are the income
statement (sometimes called a profit and loss
statement, or P/L) and a balance sheet. These documents measure the condition of
your business from two different angles.
Income Statement
The income statement reflects the revenue your business
generates, the expenses you pay, and the profit (or loss) that filters down.
This is done by showing your revenues, subtracting the cost of goods sold (which
reveals the gross profit), and then subtracting all your operating expenses to
show your net profit. And, after all, it's that net profit number that really
matters.
The top of the income statement lists all the money your
business took inyour business's revenues. The bottom of the statement lists all
the money you paidyour business's expenses. Subtract the bottom from the top and
the number you get, expressed on the last line of the statement, is your
business's profit or loss.
Most businesses will create an income statement for each month
in the year and then a comprehensive income statement at the end of the year.
Many businesses like to track their progress over the course of the year and
create a year-to-date income statement at the end of each month, as well.
Balance Sheet
The other essential financial statement is the balance sheet.
The balance sheet looks at your business in a slightly different fashion from an
income statement. Instead of looking at pure monetary profit (or loss), the
balance sheet measures how much your business is worth. It does this by
comparing your assets (the things you ownincluding your cash on hand) with your
liabilities (the money you owe to others).
Assets go on the left side of the balance sheet, and
liabilities go on the right. The total number for each column should be
equalhence the "balance" part of the title. You should generate a balance sheet
at the end of every month and at the end of the year.
Note
See Appendix A for
a detailed explanation of income statement and balance sheet line
items.
Software for Small Business
Accounting
How do you put together all your
business data and generate these financial statements? You have two practical
options: hire an accountant or use an accounting software program. (You could
also, I suppose, keep your books by hand, on oversized sheets of ledger paper
while wearing a green eyeshadealthough hardly anyone except latter-day Bob
Cratchets do it that way anymore.)
We'll look at accounting software first.
There are many different programs you can use to keep your
business's books. The simplest of these programs are the personal financial
management programs, such as Quicken and Microsoft Money. They may be able to do
the job if your business is simple enough, but most small businesses will find
them somewhat limited in functionality. A better choice for many eBay businesses
is QuickBooks, which is a more full-featured small business accounting program.
If your business is big or unique enough, however, even QuickBooks might not be
powerful enough; in that instance, you can evaluate other more powerful business
accounting packages.
Quicken
The most popular financial management program today is Intuit's
Quicken (www.quicken.com). Quicken comes in various flavors, only one
of which has features of use to the small business. That version, Quicken
Premier Home & Business, lets you track your business expenses, record
assets and liabilities, generate customer invoices, and create basic financial
statements.
Microsoft Money
Microsoft Money (www.microsoft.com/money/) is a direct competitor to Quicken.
Like Quicken, Money comes in various flavors; the version of interest to eBay
businesses is Microsoft Money Small Business. This version offers similar
functionality to Quicken Premier Home & Business, as well as basic payroll
management.
QuickBook
A better option for most small business owners is Intuit's
companion package to Quicken, called QuickBooks (www.quickbooks.com). There
are a number of versions of QuickBooksSimple Start, Pro, Premier, and Enterprise
Solutions. For most eBay businesses, either the Simple Start or Pro version
(shown in Figure 6.1) should be more than
good enough.
You can use
QuickBooks not only to do your monthly accounting and generate regular financial
statements, but also to manage your inventory, track your sales, and do your
year-end taxes. QuickBooks even integrates with PayPal, so you can download all
your PayPal-related transactions into the software program, and manage
everything all in one place.
Intuit also offers a web-based version of QuickBooks, called
QuickBooks Online Edition, which you can access from the main QuickBooks
website. This Online Edition keeps all your records online, so you can do your
accounting from any computer, using nothing more than your web browser.
QuickBooks Online Edition isn't quite as robust as the standalone version, which
makes it best for those eBay businesses with simpler needs. You'll pay $19.95
per month (or more, depending on the plan) for this service.
Tip
If you use QuickBooks, you want to download eBay's Accounting
Assistant program. Accounting Assistant lets you export eBay and PayPal data
directly into QuickBooks, and is free to usealthough to generate the necessary
data you also need a subscription to eBay Stores, Selling Manager (Basic or
Pro), or Seller's Assistant (Basic or Pro). Get more detailsand download the
programat pages.ebay.com/help/sell/accounting-assistant-ov.html.
Other Small-Business Accounting
Packages
If QuickBooks doesn't satisfy your accounting needs, other
small business accounting programs are available. Some of these programs are
more fully featured than QuickBooks, and more complicated to use. That might not present a
problem if you're relatively numbers-savvy, but if accounting doesn't run in
your blood, some of these programs might be more than you can handle.
Here are a few of these accounting packages to consider:
Working with an Accountant
Even if you use an accounting program like QuickBooks, you
still might want to employ the services of a professional accountantat least to
prepare your year-end taxes. That's because an accountant is likely to be more
experienced and qualified than you to manage your business's tax
obligations.
Many small businesses use QuickBooks to generate their monthly
financial statements but then call in an accountant to prepare their quarterly
estimated taxes and year-end tax statements. This is a pretty good combination;
you can have QuickBooks print out just the right data that your accountant will
need to prepare your taxes.
Of course, you can also use an accountant to handle all of your financial activities. This is a
particularly good idea if (1) your business is generating a high volume of
sales, and (2) you aren't particularly interested in or good at handling the
books. You'll pay for this service, of course, but if your business is big
enough, it's probably worthwhile.
Where do you find a reputable accountant? You should check with
your local chamber of commerce or SBA office, as well as other local small
business organizations. It wouldn't hurt to ask other small business owners;
word-of-mouth is often the best way to find simpatico service providers.
In addition, you can use the Internet to search for small
business accountants in your area. Check out these websites:
However you find an accountant, know up front that he or she
will need you to keep some very specific financial recordslike those we
discussed earlier in this chapter. Your accountant can't track your business
unless you're tracking your business, so work with your accountant to set up the
best recordkeeping system for your business needs.  | 
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