In my last two articles I mentioned that the purpose of a business is to make a profit by satisfying human needs. If you are wanting to start a business, you need to carefully analyse the feasibility of the business before you get started.
I am not going to go into detail about how to decide if a business idea is feasible, but rather the practical steps that are taken, as far as money is concerned, when you start a business. I will start with the business knowledge, then translate it so that it applies to your household. I advise that you understand the business side as well as the household side.
Please note that I am using the $ sign to indicate money and this isn’t relating to any specific currency. Therefore some of the amounts of money used in the examples are unrealistic as they are simply examples.
Begin household bookkeeping is lesson 3 in my Free Online Bookkeeping Course
Begin Bookkeeping: A business perspective
Financial Contribution and Issuing Receipts
Every business requires at least some money to start. Therefore the owner will have to make a financial contribution to the business to get it up and running.
For example, A. Johnson is a qualified mechanic and he has decided to open his own workshop since there are no mechanic workshops in the suburb where he lives. From talking to various people he found out that he would need about $50,000 to buy equipment and another $20,000 to pay for the running expenses for the first 3 months. He discusses the business idea with his father who agrees to loan him the $70,000 he needs to start the business.
He officially accepts the $70,000 on behalf of his business and issues a receipt. It is sound practice to acknowledge receipt of all amounts received by a business. This is done by issuing a receipt document.
The receipt is made out in duplicate. Mr. A. Johnson takes the original receipt and the duplicate is used to make the bookkeeping entry. We will discuss the bookkeeping entry at a later stage.
Example of a Receipt
Below is an image of a typical receipt. The layout of receipts vary, but the following is an example of the basic information a receipt needs to contain.
- Number of receipt
- Date on which receipt is issued
- Name of person from whom money is received
- Amount in words
- Amount in figures
- Signature of person who received the money
- Name of business/person to which payment was made
- What the payment was for
- Form or nature of the money received
Opening a current bank account
A current bank account is also called a cheque (or check) account. It is imporant for a business to have a bank account for cash deposits and withdrawals.
A bank account has many advantages, including keeping money safe and the convenience of being able to make payments by debit card. Banks do not provide the services for nothing though and charges are made for various transactions. You need to go to a couple of banks and get the costs involved in having an account with them. Examples of various charges to compare are:
- Monthly service fees – this is the cost to keep the account open.
- Cash deposit fee – this is the cost to deposit money into the account. It is usually a percentage of the amount you are depositing
- Cash withdrawal fee – this is the cost to withdraw money from the account. It is usually a set amount or a percentage of the amount you are going to withdraw.
- Swiping – the amount it costs per swipe of the card. Most banks in my area allow you to swipe the card for free.
- Overdraft fees – how much it will cost you if you borrow money from the bank as an overdraft.
A word of warning: the bank charges mentioned above can really add up if you have never bothered to research them. When I took over the business bookkeeping I was able to cut the Bank Charges by 60% just because I saw how much it cost to withdraw or deposit money into the bank account. We only withdraw money when absolutely necessary, and in bulk. We also updated our system so that instead of the business paying the electricity and water accounts, I paid one lump sum called “Office Rent” to my in-law’s because the office is at their house, then they pay the water and electricity from their bank account because a personal bank acccount gets free card swipes, where a business bank account is charged for card swipes.
When you have decided which bank best suits your needs then you go to your bank of choice and fill in an application form to open a current account. The bank will consider the application and allocate an account number if the application is successful.
Finally, you need to make an initial deposit into the bank account. Each bank has a minimum deposit amount to kickstart the account. You can ask a person at the bank for help filling in the deposit slip if you need it.
Once you have finished setting up your bank account you will be issued a bank card, and possibly a cheque book. The use of cheque books is becoming obsolete though.
Begin Bookkeeping: A Household Perspective
Translating the business perspective for a household
When you start out with your household bookkeeping the capital contribution will be whatever money you have saved for the household at the present moment. This may be the emergency fund or a holiday savings fund. If you have nothing saved, then the capital contribution will be the first month’s salary contribution by each member of the household.
You will also need to get a commitment from each household member as to how much money they will be able to contribute to the household from their income on a monthly basis. This will either be an amount of money that comes from their bank account and goes into a joint account in order to pay household expenses, or it will be a commitment from the household member to be solely responsible for a specific household bill (if they don’t want to give of their money into the household account).
That being said, I recommend that each household has a bank account that the person doing the bookkeeping is responsible for. This person can pay bills from this account. This account serves as a “business” bank account. The person paying the bills needs to be completely open with the other members of he household regarding the bookkeeping. Each person should be able to see the bank statements at any time they wish. This causes the other members of the household to trust that the bookkeeper isn’t pocketing money for themselves. As with a business, the household accounts should be kept separate from personal accounts.
I also recommend that every household has a cash receipt book. Even if you never give the original document to the person you received money from, it will make the tracking of money that has come in easier.
Conclusion and tasks:
After this you should know how to fill in a receipt, and what to check when opening a bank account. Here are some tasks for you to complete before moving onto the next step:
- Buy a receipt book for your household (optional)
- Research the bank charges of potential banks where you will open a household account OR research the bank charges of the bank where you already hold an account.
- Open a household bank account or move your current household bank account to a more affordable bank.
- Figure out what the capital contribution for your household is going to be.