The primary function of your retail store is to make a profit. What is a profit? How do you know when you've made one? How can you make more profit? Even if you're blasé about profits, the tax collector isn't. Taxing authorities require that you keep accurate records of income, expenses, and subsequent profits. The more your store makes in profits, the more detail you will need.

More important, you want to know where your profits came from and your losses went to. As the owner, manager, and boss, you want to increase profits and reduce losses. That's your primary task. Knowledge is control.

Journals and Ledgers

Journals are the books of original entry, in which you record transactions as they occur. Smaller businesses use a single journal, called a general journal, in which all transactions are recorded. Larger businesses also have journals for specific functions: purchase journal, sales journal, cash receipts journal, cash disbursements journal, payroll journal, and others. In larger businesses, the general journal is a catchall document that includes any incidental, start-up, or closing entries needed by the business. Everything else goes into a specialized journal.

As appropriate, journal entries of transactions are transferred or “posted” to ledgers. Ledger pages are the gathering place of specific types of accounts. For example, an invoice from a supplier is recorded in the purchase journal, then posted to the accounts payable (an account that needs to be paid) ledger. The five types of ledger accounts are asset (what is owned), liability (what is owed), capital (the difference), income or revenue (money collected), and expenses (money spent). The capital account is also known as the owners’ equity account or net worth.

Debits and Credits

Each ledger account entry is an increase or a decrease to the account balance. An increase to an asset or expense account is called a debit, and a decrease is a credit. Recording an electric bill is a debit to the utility expense account; paying the bill is a credit. Conversely, an increase to a liability, capital, or income account is a credit and a decrease is a debit. Buying inventory is a credit to the inventory asset; paying for it is a debit. On the ledger page, debits are always recorded on the left-hand column and credits are on the right. Confused yet? Don't worry. It becomes easier with a little practice.

Single- and Double-Entry Systems

There are two methods of making entries to your recordkeeping system: single-entry and double-entry. Single-entry recordkeeping is obvious: Make an entry into a single account as appropriate. Double-entry recordkeeping adds an extra step, requiring two entries to more accurately reflect what happens in a transaction. It also adds a method of verifying record accuracy.

For example, inventory is received. That's an asset. But you're going to have to pay for it, so it's also a liability until you pay the bill. You make a debit entry to the inventory account to increase the assets. You also make a credit entry to the accounts payable account to increase the liabilities. When you pay the bill, you make a debit entry to the cash account to decrease that asset. Then you make a credit entry to the inventory expense account to reduce that expense.

Single- and double-entry recordkeeping may seem confusing to retailers who have not used the system before. It can be complex, but if you review and remember the basics you'll become adept at it and soon find it worth the study.