Business money stays honest when every rupee passes through a named cash or bank account, every cost has a head, and money the owner takes for himself is recorded as a drawing, not as an expense. Mixing the three is why a shop that sells well can still seem to make nothing.
What is a cash account and a bank account in the books?
Each is a place where money sits. "Cash in Hand" is the drawer; each bank account, Easypaisa or SadaPay wallet is its own account. Every account has an opening balance and a ledger of money in and money out, with a running balance.
When you receive a payment you choose which account got it. The books then tell you not only that the customer paid, but where the money is.
What is a transfer between accounts?
A transfer moves money from one of your accounts to another, such as depositing cash in the bank. It is not income and not an expense. One account goes down and the other goes up by the same amount.
What counts as a business expense?
A business expense is a cost of running the business that is not the cost of the goods themselves: rent, salaries, electricity, transport, loading, fuel, repairs, office supplies.
Give each expense a head. At the end of the month the heads show where the money went:
| Expense head | October |
|---|---|
| Rent | 40,000 |
| Salaries | 75,000 |
| Electricity | 18,000 |
| Transport and loading | 22,000 |
| Total expenses | 155,000 |
The purchase of goods for resale is not an expense. It becomes stock, and turns into cost only when the goods are sold. See cost of goods sold.
What is an owner drawing?
An owner drawing is money the owner takes out of the business for personal use: household costs, school fees, a family wedding. It reduces cash or bank, but it is not a cost of running the business.
Why must drawings be kept apart from expenses?
Because drawings hide the real profit. Suppose gross profit is Rs 300,000 and business expenses are Rs 155,000. Net profit is Rs 145,000. If the owner also took Rs 120,000 home and wrote it under "expenses", the books would show a profit of only Rs 25,000, and he would wrongly conclude the business is weak.
Kept apart, the picture is true: the business earned 145,000, and the owner took 120,000 of it.
Why does cash in hand never match?
It fails to match for three reasons: small expenses paid from the drawer and not written, money taken by the owner without a note, and customer payments recorded on the wrong day. Recording every movement, however small, against the cash account is the only cure. Count the drawer at closing and compare it with the cash ledger.
Should an account be allowed to go below zero?
No. A cash account cannot hold less than nothing. If a payment is larger than the balance, a receipt or an opening balance is missing. Find it before continuing.
In M-Tech Logistics: cash and bank accounts each have a ledger and transfers between them; expenses are recorded under your own heads; owner drawings are a separate entry that never lowers profit; and a payment larger than the account balance is refused unless you allow it. See cash, bank and expenses in the software. Cash and bank and expenses are part of the second package and above; owner drawings and profit and loss start from the third. Compare packages.