Using your Accounting Software

Recently I was asked to setup and train someone for QuickBooks. When I went out for the consultation I realized that the client was downloading transaction from the bank and then coding them incorrectly. For more information about downloading from the bank see “Online Banking and Your Accounting Software” I explained to the client that before I could offer an estimate for work to be performed, I needed to know how they were planning on using the software. They asked what I meant, so I explained as follows:

To utilized Accrual based accounting you must enter transactions (invoices and bills) into the system as they arrive in the mail. These transitions will have potentially three dates associated with them. The first date is the date on the document (Invoice or Bill date), the second is the date of entry (the date someone entered the transaction into the accounting program), and the third date is the due date (invoice or bills needs to be paid by). The value held in either Account Receivable or Payable is recorded for the time between the date on the invoice/bill and the date paid. When using your program in this fashion, you get maximum benefits from a managerial standpoint. You can produce aging reports, and get a better hand on cash flow. I call this the “Preventive Method” (more below).

Cash based accounting is a little different. Instead of entering bills when they are entered or invoices when the work is done, entry is done when money moves. For example, the bookkeeper would have a stack of bills on the desk and would enter them as checks only on the day that the checks would be sent out. They also would not record invoices until payment had been received. This process is very popular for smaller businesses which do not have a lot of paperwork. The owner or bookkeeper comes in periodically and catches everything up. Although this is not the preferred method for getting the most out of your accounting program, it is better than the last option. I call this the “As You Go Method” (more below).

The new option for doing business books and using software is to not enter anything into your program manually. Instead, on a periodic basis, download the transactions from your bank or credit card into your program. This is essentially the same as the Cash Based with the main difference being: there is no one checking for errors. I call this the “Need a Cure Method” (more below).

So when explaining the three methods above to the client, I explained that everyone knows when it comes to health – “an ounce of prevention is worth a pound of cure”. This is also true in accounting programs as well. Using the “Preventive Method” allows the software to give advance reporting and allows the principle to make intelligent decisions about how and when to spend money. Using the “As You Go Method” is usually not as efficient as the “Preventive Method” but still has someone entering the data and making decisions on what to pay/enter and when. However, using the “Need a Cure Method” is like running your business on the fly and then worrying about the bookkeeping later. The principles are not taking time to address this area of their business and may not even look at transaction until months later. By this time, if an overpayment was made or if a check cleared for a wrong amount or if someone was stealing from the business, the double check would come too late. Thus the pound of cure taking time and energy to go back and fix something.