You've installed accounting software on your computer, but now you wonder why it asks for so much information. What do you need to know about accounting to use this program? And how do you ensure it will be able to manage your accounting needs?
Today's accounting programs all adhere to Generally Accepted Accounting Principles (GAAP). They remove from you the need to study and memorize GAAP. These packages also make it fairly easy for you to assemble financial information to use in your daily operations and decision-making. Just as with any other kind of software, you need to understand some basics to use it well. In the electrical industry, two of the most important concepts are "properly grounded" and "meets ampacity requirements." Parallel to these concepts in the world of accounting are the words "accurate" and "reliable." To come close to getting either one out of your accounting software, you must take care to understand proper data entry methods, accounting requirements, and the accounting cycle.
Accounting software designers base their automation on a good process. In the days of do-it-yourself spreadsheet-based and database-based accounting automation, the saying was: "You don't automate a bad process." Thus, the people who used automated accounting were already intimately familiar with accounting principles and data entry methods. Today, you can buy a ready-made accounting package and use it to automate a bad process. A little knowledge of how these programs work with the science of accounting will help you automate a good process.
A major selling point of accounting software is that by using it, you don't need to be an accountant to run the financial side of your business. However, accounting software doesn't make the accountant obsolete. You still need an accountant to advise you on unusual purchases, perform the periodic audit, and give judgment in any gray areas.
The big strength of accounting software is these programs incorporate rules you don't have to remember or look up, and they do so consistently with correct math. Even accountants use these programs, because of the consistency, error checking, and solid foundation from which to work. The programs also save many hours of drudge work. However, they can work only with the information you give them. And in many cases, the entry method is critical.
At the core of most accounting packages is a "chart of accounts." You must enter the information in a consistent manner. This writer once troubleshot a leasing business's accounting system, only to find that the chart of accounts was inconsistent. The business had three office workers entering data, and each of them had independent standards. One worker entered the lessee names as "last name first name." Another entered first names, with an occasional last name thrown in. The third one entered "nickname (i.e., "Bobby" for Robert) last initial." All three of them had a bad habit of entering spaces at various points (beginning, middle, and end!), but never in a consistent pattern.
Since databases count spaces as characters to sort by, this inconsistency resulted in several different entries for a single name. This meant some of the data for a lessee would appear under one name, some data under another, and more data under yet another.
One lessee had eight names and got eight bills for accounts past due, even though the lessee had paid in full on time. My first step in repairing their system was to have them enter all names into their chart of accounts the same way they'd see them in a phone book. I asked the business manager to tie each account to a unique identifier or "key number." Unfortunately, the manager thought this was too much effort.
This same business failed to initialize the employee database with the state tax information for each employee. Thus, some employee taxes got paid and some didn't. My advice at that point was: First, correct the database and begin paying the taxes. Second, hire a CPA immediately to conduct a full audit of the business's books. Third, contact the IRS and the state tax collection authorities and work out a payment plan.
Why did this problem occur? It was not the fault of the software, but the fault of the business manager for not thinking about all of the accounting needs. Blind trust in a software package to identify all of your needs is like expecting your car to tell you what maintenance it needs next week.
It's important to note that the software manual did point out the need to initialize employee information with the appropriate tax modules. A secondary lesson here is to make yourself familiar with the software, so you at least know what modules you have.
This same business also had discrepancies between paid invoices, accounts payable, and accounts receivable. Tracing most of this back to the improper chart of accounts, we found another problem: Nobody using the software understood the basics of the accounting cycle.
We'll look at that in Part 2, and see how understanding the accounting cycle and some other principles will help you get the most from your accounting software.
Sidebar: Key Points to Remember
Here are some principles to help you use your accounting software correctly; from the beginning:
1. Decide on data standards prior to setting up your chart of accounts.
2. Always use a key number that makes each employee, customer, or supplier unique.
3. Read the manual to see what major elements you need to consider.
4. Make sure you are paying all of your taxes, including employee withholding.
5. Have a CPA review your accounting system once you get your software package installed and running.