Contrary to popular belief, accounting systems are not static. Nor are they the same for all businesses or even all businesses in the same industry. Those ideas imply that there is something about accounting that is required, but not useful – stiff, stifling, and boring. Like high school English.
Accounting is optional. You do have a choice about whether or not to do it.
I have met and worked with plenty of people who don’t pay attention to their finances and find checks bouncing off the walls. It’s a great place to start.
From Dictionary.com: Accounting is…
1. the theory and system of setting up, maintaining, and auditing the books of a firm; art of analyzing the financial position and operating results of a business house from a study of its sales, purchases, overhead, etc.
2. a detailed report of the financial state or transactions of a person or entity: an accounting of the estate.
3. the rendering or submission of such a report.
Accounting is how you get detailed information about your financial position. You can only do that if it’s set up and used to get the information you need.
There are four keys to getting the most out your accounting system so that gives you what you need for decision-making:
- Reporting and
- the Chart of Accounts
Accuracy is the first most important thing to ensure in your system. In fact QuickBooks and other pre-packed software systems have a function called reconciling that helps you find discrepancies. If you don’t have the right numbers, you can’t get accurate information.
The second is consistency. It’s more important that most pieces of accounting: if you don’t update consistently, you don’t have accurate information and you can’t do other important things like reporting. Consistency is also important for another reason, like brushing your teeth. It’s improves your current and if you do it regularly it improves your long-term health. It is an investment in the future of your business.
Reporting is the function that aggregates (or puts together) all the information that you’ve been entering and gives it to you in one neat little package for easy reading. If you are entering the information consistently and accurately, these reports can give you up to the minute information about your money that even the banks don’t know – that’s exciting! Reports are what moves you beyond bookkeeping as a chore to using accounting for management decisions, budgeting, hiring, expanding, and so on. Reporting rocks!
The last piece we’ll touch on today is your chart of accounts. That’s the place where you find the categories of transactions that you use (which is another basis for reporting). Some of them like “postage” or “printing and reproduction” are about expenses and seem straight forward and the easiest for people to understand.
I find that people get into trouble in two main places in their accounting: categorizing/understanding income and balance sheet accounts. Assets, liabilities and equity seem to confound people regularly to the point where they give up and stop doing accounting all together. Understanding those pieces will make your accounting a lot easier. If you don’t understand them either do your homework or hire someone to help you set these accounts up and teach you how to use them. This, in my experience is a critical piece of a business and deserves the time and dollars you put into it. In fact I find that as a bookkeeper and accounting consultant, having this piece in order makes the other pieces both possible and likely to get done. Having clarity here creates a place for people to take action from.
I think accounting can be a lot of fun. It can also be a function of your business that really supports and informs your decision making and growth. It’s up to you to keep it healthy and vibrant.