One of the primary challenges of being a business owner is called reconciliation. This refers to balancing what you earn with what you spend. Accountants commonly make use of what is called a double-entry method. This means that every time a credit (earnings or money deposited) is entered, a debit (expenses or money spent) is also entered.
When a business reconciles its revenue, it shows not only how much it has received but also how revenue has been disbursed. The double-entry method is a way to reconcile revenue against expenditures, investments and deposits. This provides you with a clear picture of how you use your income.
Debt Payments
When you use revenue to pay down debt, debit your cash account and credit the debt account. This provides a clear trail of how your earnings were used to pay the debt. Show the amount taken out of the cash account and an equal amount should be shown as a deduction from the loan or debt. The amount left over in the cash account and the amount paid to debt must add up to your total revenue.
Expenditures
When you make business-related purchases or pay people related to conducting your LifePharm business (such as assistants or videographers), debit the amounts from your cash account. Then show the matching debits from the appropriate expense accounts. This shows where the cash went and supports your claims for expense deductions on your taxes. These are the numbers that must be shown in the event there is a tax audit, so it’s important for you to check these figures frequently and update them as they change throughout the year. Whenever you plan expenditures, it is prudent to examine your projected earnings to make sure you have enough cash on hand to avoid incurring debt.
Investments
Once you have paid for basic living expenses, what do you do with the extra money you earn? If you use part of your revenue to invest in stocks, bonds, certificates of deposit or other investments, you must create a clean money trail. Once again, use the double entry method by debiting your cash account for you take out to invest, and then credit the investment account for the same amount. The cash account is where the revenue first shows up, so you take your total deposited amount for each month as your earnings total. As you invest you continue to debit the cash account, and it becomes clear that it came out of your earnings.
Total Revenue
Debits (outgo), credits (income) and cash on hand make up total revenue. What this means is that all the money you take in must be allotted into the categories of investments, expenses, debt payments or cash deposits. If the amount you disburse does not match the amount of revenue, you need to find the discrepancy. Once you match up earnings and disbursements, you have successfully reconciled your business revenue!