The Use of Estimates

At first glance, it will seem as if bookkeeping is a very exact science, with each number coming from a specific source document. However, there are many instances in which estimates are used in accounting. These estimates are made with as much information as possible, but still contain some subjective reasoning. Some examples are bad debt reserves, accrued liabilities, inventory obsolescence, and goodwill amortization.

When you read the financial statements of other companies, you should keep in mind that those statements have been prepared using these types of estimates. In fact, in public companies, there can be great debate among the management, the external auditors, and the investors as to which estimates should be used in the final statements!

The Importance of Bookkeeping

I will take a few moments to discuss how crucial "taking care of the books" is. I have seen hundreds of small business owners who didn't understand the importance of record keeping and always put it off until "later." "Later" rarely happens until it's too late. These business owners are almost literally buried under a pile of papers, overwhelmed by the immensity of the task at hand, being threatened by various levels of government because they are late filing returns, and too afraid to answer their phones for fear it's a creditor demanding payment for a bill that is some­where in that pile. Not only are these people not planning and growing their businesses, they are also simply juggling paper, hoping to keep the doors open.

I implore you right from the beginning to take your book­keeping seriously. It can be the difference between bankruptcy and success. You can't know how you're doing until you record it.

If you feel that you cannot keep up with the bookkeeping or do not have the patience to deal with it, by all means, hire a book­keeper (there will be more about that in later sessions). Do not pile all your papers in a shoe box (or a refrigerator box!), hoping that magic little bookkeeping fairies will come along and make it all go away. It's much more likely that the Wicked Witch of the West (in the form of government auditors) will show up and "help" you with your mess. That form of help could cost you thousands of dollars in interest and late-filing penalties. Save yourself the grief and get on top of your bookkeeping today.