RECORDKEEPING

Inventory and Sales Records

Minimum Records Required
There are four basic records that a business must maintain: 1)Sales Records, 2) Cash Receipts, 3) Cash Disbursements, and 4) Accounts Receivable.

Sales Records
A record of all sales must be kept. If you use a cash register, a combined Sales and Cash Receipts record may be kept. Sales may result from a single primary activity or may result from different types of activity and be recorded in subcategories. For example, a business might record three kinds of sales: wholesale, retail, and services.

It is important to record all sales as they occur. Remember that a sale may result in cash or arrangements may be made to receive payment at a later time. In either case, the sales records should reflect that the sale has occurred.

Cash Receipts
Cash is received by a business at the time of the sale or as payment on account for a credit sale. In any case, all cash should be recorded as it is received. A small business without a cash register can enter each transaction in a Sales and Cash Receipts Journal showing the date, name, invoice number, and the amount of the sale.

Deposit all cash receipts for the day in the bank. Do not pay out small amounts directly from cash receipts. Instead, establish a petty cash fund to pay small amounts not covered by invoices. By depositing all cash receipts daily, you have a basis on which to verify the daily balance in the cash receipts book.

Cash Disbursements
Just as all cash receipts should be deposited, nearly all disbursements should be made by check. The petty cash fund, as stated earlier, should be used to make payments only on small items.

When writing a check, use an invoice or bill to support the check. In the checkbook, record the purpose of the check, the date, name, check number, and the amount of the check. Bank charges should be recorded in the same manner as a check except, of course, they would not have a check number.

Accounts Receivable
The fourth basic record to be maintained is for credit sales. If a business provides a product or service to a customer and agrees to accept payment at a later time, it has created an account receivable. An account receivable record normally contains information pertinent to billing and receiving payment from a customer.

Every effort should be made to ensure that accounts receivable are kept current. Bills should be prepared promptly and mailed to correct addresses. At the end of each month, accounts receivable should be "aged." Aging means listing all accounts unpaid for 30 days, 60 days, and over 60 days. Special action should be taken to collect older overdue accounts. Extraordinarily large accounts should be watched carefully.

For delinquent accounts, try to get the customer to promise payment on a specific date. Then, if payment is not made on that date, contact the customer to find out why payment was not made. Be persistent, it's your money.

RECORDKEEPING PROCESS

A small business involved in ordering and selling merchandise should have a recordskeeping process that reflects the flow of that merchandise through the business.

Ordering and Receiving
The process begins when a business orders merchandise. An order can be written or oral. Oral orders should be documented with a written record. Copies of all orders should be retained.

When merchandise is received, it should be checked for quantity and condition, checked against the packing slip, and checked against the original order. Any discrepancies should be noted and the supplier notified as soon as possible.

The merchandise is then recorded on a Receipt Log listing quantity, description, and source. The Receipt Log serves as the basis for additions to the Inventory List, which is a complete record of all goods available for sale.

When an invoice (bill) is received from a supplier requesting payment, the invoice is checked for accuracy and verified against the Receipt Log and the original purchase order. A check should then be written to the supplier for the appropriate amount.

As sales of merchandise are made, goods are removed from inventory. If the merchandise consists of large, expensive items (e.g., automobiles, refrigerators, etc.), the inventory list may be maintained on an item-by-item basis with a sale resulting in the immediate removal from the inventory list of the item sold. On the other hand, many businesses sell a large number of inexpensive items; a small grocery store, for instance, might sell 200 boxes of cereal. For these businesses a periodic physical count of merchandise available for sale is the only realistic way to keep track of inventory.

Sales can be cash or credit. In either case, the sale is recorded at the point of sale. The sales slip serves two primary purposes. First, it is the original record of the sale used to record that transaction in a journal. When a cash register is used, the cash register tape and total at the end of the day serves as the sales slip. Second, sales slips are used to reduce the inventory listed, at least when a perpetual inventory (item by item) method is used.

Sales for cash are recorded as Sales and as Cash Receipts. Sales on credit are recorded as Sales and Accounts Receivable. Credit sales require that a customer credit account be established and maintained.

Completing the Cycle
The reduced inventory resulting from sales signals the need to order more merchandise. Purchase orders are written and sent to suppliers and the cycle of merchandise flowing through the business continues.

Much of the process of recording and tracking inventory today is done by computers and or computerized cash registers. However, these new systems are only as accurate as the information which is entered into them and checks and balances for human error still exist. By utilizing a computerized system it is possible to know on a daily basis what the inventory and sales for each item are and to plan for re-orders of merchandise in a more effective manner. They also provide an efficient method for determining loss by "shrinkage and theft."

Inventory-Related Records
Inventory records are vital for ensuring that adequate quantities and types of merchandise are available for sale. There are two basic methods. The first, the perpetual method, keeps track of each item available for sale. As each item is sold, the inventory is reduced. The perpetual method works well with big ticket items.

More suitable for businesses selling large quantities of inexpensive items is the periodic inventory method. This method relies on a physical count of all merchandise available for sale periodically with inventory records adjusted to reflect the actual counts. The difference between the items on hand and the items purchased for sale represents the amount of items sold (although adjustments for shrinkage--shoplifting, employee pilferage, and the like--have to be made).

Inventory records should include the name, description, amount, and cost of merchandise in stock and on order. Also needed is supplier information, the dates items were ordered and received, and the name of the person who placed the order. For periodic inventory systems, the records should also include the date of the last physical inventory count and the names of the persons who conducted the inventory.

As noted earlier, there is a growing trend to use computerized inventory systems. Many software programs exist which are designed for specific businesses. You should make a complete study of available programs and check with individuals using the systems before making a decision to purchase a standard software inventory program or to have a custom program designed.

Understanding that inventory can be a liability rather than an asset and knowing how to plan and control your inventory are both crucial to your profit picture. The relationship of inventory to profit and loss will only be visible with an accurate records-keeping system.

For information on the use of a computer to simplify your record keeping, click HERE