A Child Care Guide to Bookkeeping

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The goal of this document is to help child care center owners understand the basics of bookkeeping for their business. This is a beginner’s guide to bookkeeping for the child care industry. Bookkeeping is a set of tasks to track and manage how a child care center makes and spends money. Bookkeeping refers to the process of accumulating, organizing, storing, and accessing the financial information base of a child care center.

Staying on top of bookkeeping is crucial to the success of a center. Here are a few great reasons why good, accurate bookkeeping is important:

  1. To have accurate information for taxes
  2. To understand how a center spends money
  3. To know who owes the center money (Accounts Receivable)
  4. To know who the center owes money to (Accounts Payable)

As mentioned earlier, bookkeeping is a set of tasks to track how one would manage their child care center(s). Some of those tasks include:

  1. Sending invoices to families
  2. Marking invoices as paid once a family submits payment
  3. Following up with families who have not paid
  4. Paying directors, teachers and other staff members
  5. Tracking payments made to child care center staff
  6. Paying bills and keeping track of payments made
  7. Paying taxes (While it may sound like bookkeeping is tax preparation, it’s not. Taxes are just a small portion of bookkeeping.)

Terms to Know

Accounting Period

The time period for which financial information is being tracked.

Accounts Receivable

Accounts receivable is a debt owed to the center. It is the money they make from their families. This process involves sending out invoices, marking them as paid as the center receives payments from them, and following up on past due or unpaid invoices.

Accounts Payable

Accounts payable is a debt owed by a child care center. This process involves paying for expenses like advertising, training, wages, and more. A center should categorize these expenses to show how they are spending their money and also so they can figure out what expenses are deductible around tax time.

Assets

All the things a child care center owns in order to successfully run its business, such as cash, buildings, land, busses, and furniture.

Balance Sheet

The financial statement of the child care center’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).

Equity

The money invested in the child care business by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account.

Expenses

All money spent to operate a child care center that is not directly related to the sale of individual goods or services.

General Ledger

Where all the company’s accounts are summarized.

Income Statement

The financial statement that presents a summary of the center’s financial activity over a certain period of time: month, quarter, or year.

Liabilities

The debts the company owes, including loans and unpaid bills.

Payroll

The way a child care center pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workman’s compensation.

Revenue

All money collected for child care services provided.

Reconciliation

Refers to the process of ensuring that two sets of records (usually the balances of two accounts) are in agreement. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period.

Paying Employees

There are many ways to pay directors, teachers and other child care center staff. SmartCare’s child care management software integrates with many payroll companies, so be sure to ask one of our reps for details during onboarding.

Be sure to collect a W-4 from any employee a center pays. It’s a good idea to get these forms filled out before remitting payment to employees. Having employees fill this out during their first week is a good rule of thumb. There are advantages to having the forms completed prior to payment such as ensuring that the person you are paying is legally allowed to work, and not having to chase down all the people that have worked, throughout the year, at tax time.

Accounting Methods

The two basic accounting methods are cash accounting and accrual accounting. The difference between these two accounting methods is the point at which a center records sales and purchases in their books.

If a center uses cash accounting, they will record transactions when cash changes hands. For example, they record the cash given to their center from a family when it is given to the center. If the family pays for the month in advance, they record the cash when it is given to them, not when the services are provided each week.

If a center uses accrual accounting, they record a transaction when it’s completed, even if cash doesn’t change hands. For example, they record the cash given to the center from a family when services are provided. If the family pays for the month in advance, the center would record the transaction after child care services have been provided.

Finding and Fixing Discrepancies

Sometimes books can get tricky and balances don’t match up. Reconciling bank accounts can solve this. Using the bank statement every month, a center can compare the transactions in their accounting software to the transactions in their bank account. Reconciliation ensures that the transactions in the bookkeeping application match the bank account and no mistakes have been made.

Why Does a Center Need Bookkeeping?

Bookkeeping, if done properly, can give an excellent idea of how well a child care center is doing. Bookkeeping also provides financial information throughout the year so a center can test the success of their business strategies.

Every business, not just child care centers, should always track how much money they are making and spending, even if they are just tracking this in an Excel spreadsheet. Bookkeeping is an essential part of running a business.

For more information about how SmartCare can ease the bookkeeping process, click here.