If your small and growing business doesn’t have an accountant yet, or if you want to make it really fast for your accountant to get through your records and start delivering the meaningful insight that you are hiring them to provide, you need to build and implement a spreadsheet-based accounting system as early as possible.

Here’s how to do that:

Step 1: Open your favorite spreadsheet.
You should use something that most accountants will use (so that when you pass your work to them, they can access it easily). So consider Microsoft Excel or Google Spreadsheets.

Step 2: Create 3 sheets.
Within each spreadsheet file, down near the bottom of the screen, is a place to create sheets. You’ll want to have 3 and you should rename the sheets to read: “cash flow statement”, “income statement”, and “balance sheet”.

Step 3: Format each sheet.
The cash flow statement measures the flow of money into and out of your business over a period. So, you’ll want to format your sheet so that you measure the period across the top (weekly or monthly, depending on how much cash flow you have), and then the following labels in the rows below:

• Opening balance
• Cash from sales
• Cash paid out
• Closing balance

The income statement, also known as your “profit and loss” statement gives you a snapshot of your business’ profitability over a particular period. So, make sure you include the period at the top of the sheet and then put the following labels in the rows below:

• Sales
• Cost of sales
• Gross profit
• Expenses (which you’ll want to itemize individually, including wages, rent, utilities, etc.)
• Net profit

The balance sheet gives a snapshot of the accumulated success of the business in a given period. So, make sure that the period is listed across the top of the sheet and then put in the following labels in rows below:

• Assets (itemize these as cash, physical assets, receivables, stock)
• Liabilities (itemize these as capital, loans, and payables).

The basic spreadsheet is set up. The important thing to remember is this: On their own, spreadsheets don’t really matter. They are a means to two ends:

1.    Providing valuable records so that your bookkeeper, accountant, stockholders, and IRS (if they ever audit you) have all the information they need at their fingertips.
2.    Providing you with real insight into your business so you can make better business decisions.

In an upcoming blog I’ll show you how to put your spreadsheets together so they are automated and useful for you!

Many merchant accounts (these are the people that permit you to accept credit cards) just take a monthly debit out of your bank account at the end of the month, these are easy to account for, you simply enter a withdrawal in your account register for the amount debited and categorize it as Merchant Processing Fees, which should be a COGS or an Expense (this varies by where you are located and your industry, check with your accountant if you are unsure).

However, what about those merchant accounts that take the percentage before you even get the money, similar to Paypal? This makes it more difficult to track, however, I do have an answer.

(I want to say that I recommend that the following is done even if your fees get debited as a whole so that you can process the flow of your income.)

1. Open up a new bank account inside of QuickBooks, call it Merchant Account, or PayPal, or Google Checkout (whoever your processor is). Don’t hesitate to set up multiple, as a matter of fact many of my clients have multiple, so I set up an account titled ‘Merchant Accounts’ and then I have sub accounts titled PayPal, Google Checkout, Chase Paymentech under the main ‘Merchant Accounts’ account.

2. When you receive your payment for services (via Invoices or Cash Receipts) don’t deposit directly into your checking account, deposit it into the merchant account it goes into, because let’s be honest, it is not in your checking account yet.

3. As the monies show up in your checking account, transfer the funds from your merchant account to your bank account. This also makes it easier for PayPal when you may accumulate funds in the account and only make random transfers from the PayPal account.

4. Accounting for your fees/costs – can be done in one of three ways:

• If you get lump sum fees at the end of the month debited from your checking account, don’t worry about doing anything differently, just record that transaction once it posts.
• If you are using a service like Google Checkout or PayPal you can ‘see’ how much they take out via their transaction reports, so at the same time you make that transfer from your ‘merchant’ bank account in QuickBooks to your ‘checking’ bank account in QuickBooks – you can make a withdrawal entry from your ‘merchant’ checking account for your merchant processing fees.
• If you are using a more standard merchant services provider, you rarely get daily reports, and rather get monthly reports, at the end of every month when you get your reports, take the cost of the fees they charged you off of the statement and make a lump sum withdrawal from your ‘merchant’ bank account for your merchant processing fees. This is a good way to reconcile too, making sure you received all your monies, because at the end of the month after you enter the fees, the only thing left in your account should be any undeposited recent payments.

For my FreshBooks followers:

I promised you a follow up to my recent ‘making FreshBooks and QuickBooks play nicely posts’ – if you have not read them yet, check them out:

Making FreshBooks work with QuickBooks and vice versa Part 1

Making FreshBooks work with QuickBooks and vice versa Part 2

My suggestion for you all in regards to credit card processing fees is to do the same thing that I suggest above – create additional accounts for your merchant processing accounts and rather than depositing the payments received directly to your bank account, place them in their appropriate merchant account as the ‘middle man’ before it hits your bank account, and follow one of the three options above for recording the appropriate fees.

Do you have any questions or specific circumstances that I did not help you with? Feel free to comment on the post with your question(s) and I will respond personally!

Stay tuned, in the upcoming week I am going to talk about allocating Sales Tax in QuickBooks for FreshBooks users, incorporating it into my previously suggested methods for recording receivables and revenue.