As the advance of progress for a business gets rolling, the numerous factors at play inevitably create accounting difficulties. Although perfect accounting is as mythical as the unicorn, entrepreneurs must adopt a strategy of keen bookkeeping oversight. Lacking this practice is certain to result in mistakes, which proliferate into a chain of events that set off a low standard of business.
Like an untreated wound that festers into a severe infection, losing track of accurate financial data will cripple an operation. Sound basic procedures go a long way to promoting business success.
Receivables Reconciliation
Matching customer payments to invoiced work is clearly a crucial objective for every enterprise. The proliferation of accounting software to aid in this process has been both a blessing and a curse. The blessing is less time spent finding invoices and comparing payment amounts. No more verbal quotes and hand-written invoices. This permits simplified tracking of unpaid invoices and eliminates disputes. Moreover, summary financial statements of income and costs are compiled with no additional steps.
The curse of accounting software is a consequence of misplaced comfort that a computer automatically accounts for what actually transpired. In fact, accounting applications only record what a human enters. Reports must be examined to assure that transactions are posted to the correct accounts. Entering a received payment and not applying it to an invoice – or to the correct invoice – results in erroneous statements of income and costs. To avert this trouble, monitor Accounts Receivable Aging reports to assure payments are posted to the right invoices. An accounting program should produce “cash basis” financial statements, which by definition will not indicate any balance for Accounts Receivable – unless an error has been made.
Payables Problems
Another reasonably obvious bookkeeping goal is paying bills received from vendors. Accounting software permits entry of a bill and subsequent payment. But a frequently elusive habit is correctly applying payments to existing bills in the system. Matters are easily distorted when, for example, paying a bill by company credit card and then paying the credit card bill. Failure to follow the exact steps in these events will render inaccurate reporting of income and expenses.
Again, the solution rests with examining reports for Accounts Payable. And a “cash basis” Balance Sheet should not contain any amount for the Accounts Payable account. Moreover, an ideal practice is not entering loan payments as bills to pay. The indebtedness is already in the bookkeeping system and reflected as a liability on the Balance Sheet. Loan payments, therefore, need not impact the accounts payable process. Simply record a check and apply respective amounts to the separate accounts for the liability and interest expense.
Setting high standards of accuracy for accounts receivable and accounts payable is a definitive statement about securing reliable compilation of business income and expenses. Tax professionals will know if mistakes have been made in these areas with accounting software. Only an uncaring accountant will permit income tax reporting of spurious data. And honest accountants experience difficulty locating errors that occurred over long periods. Hence, quickly finding your bookkeeping mistakes and correcting them immediately is crucial.
The Finance Writer 