The 3 Pillars of Healthy Financial Books

The 3 Pillars of Healthy Financial Books

If we can summarize "healthy books" in a few short characteristics, I'd make them the following three: 1. Structure, 2. Consistency, 3. Cleanliness.

1. Structure:  

Organize accounts and sub-accounts logically to yield meaningful insights. Consider your future reporting needs: "What details do I want to see on my profit and loss report?" 

It's extremely important to ensure separate accounts for owner's personal expenses, especially those used for business purpose too. Even if for some reasons you might want to have it classified as "expense", you should still record them under a separate account (preferably an "other expense" account) or put it into a "class" or category. 

2. Consistency: 

Use uniform accounts and categories for all of the transactions of the same nature. Inconsistent use of accounts, even when both are correct, results in being unable to have a clear picture of the finances. And by the way, this is very common! 

3. Cleanliness: 

Eliminate and delete wrong transactions. Examples could be uncleared checks and deposits, cancelled invoices, unpaid bills which were really paid under the expense account (instead of applied to bill), etc. Some of those transactions simply need to be deleted while others need to be handled. But just leaving them sit results in a mess (specially on the balance sheet where you never get rid of them!) 

By prioritizing structure, consistency, and cleanliness, you'll maintain healthy financial books, enabling informed decision-making and a clear financial picture.