You have an accounting software package, but you still have accounting glitches. What could be wrong?

Accounting software is a tool, not a replacement for sound accounting practices. It's easy to automate an accounting system, but if you automate a bad system, you're asking for trouble. If you approach accounting software with a basic understanding of sound accounting principles, you should find it easy to use. These 10 tips will help you overcome some of the common errors involved in using accounting software.

Tip 1: Understand basic accounting. If you don't have an accounting background, seek some training or hire someone who has such a background. You don't need a degree in accounting to use accounting programs, but a basic understanding of accounting principles is essential. You may not have time to take an introductory course at your local college, but any basic accounting book will give you a feel for what it's all about. You should at least understand accrual accounting versus cash accounting, double-entry accounting (credits and debits), internal control, and the different types of accounts and ledgers.

Tip 2: Select the right package. If you own or work for a small shop, you may get by with a general-use "shrink-wrapped" package from your office supply store. But if you are handling complex transactions, you may need a customized package. You can find accounting software selection books on the Internet to help make your selection, or check out the EC&M Buyer's Guide at www.ecmweb.com. The selection process can be tedious and grueling, but attention to detail at this stage of the game will pay off later.

Tip 3: Use the reference manual. Unfortunately, if you're like most people, you hate to read manuals. Most of a manual's content covers techniques for executing some function of the software. You may not need this much detail. Read the table of contents, then skim the chapter headings to see what's in the manual. Skimming the paragraphs immediately under main headings gives you the basic knowledge you need, without bogging you down. Using this technique, you should be able to handle 100 pages of instruction manual in 15 min. to 20 min. When a problem arises, you'll be familiar with where to look for an answer. Finally, read the first chapter or two the way you would normally read a text. In less than an hour, you'll know most of what you need to know to make using the software a good experience.

Tip 4: Set up your chart of accounts. This is the core of your accounting system. Everything in it depends on how accurately the system can look up a customer or vendor account. Within an accounting system, each customer or vendor is a record with a primary key that makes it unique. Did you ever wonder why companies issue a "customer number" on an invoice when you buy something? That number is actually your identifier, or primary key. It is the number they use to track you inside their accounting system.

Whether you have primary keys or not, the format of the name is critical to preventing multiple records for the same entity.

If you mix an entry like "Jones, Robert" with "Bob Jones," you'll quickly develop an unworkable system. You might send "Jones, Robert" an invoice and then apply his payment to "Bob Jones." This means the "Jones, Robert" account will show a delinquent payment in your system. To prevent this, standardize on a format, and add extra information, such as nickname, middle initial, title, and suffix.

When listing businesses add in "Formerly Known As" (FKA) names; if your software allows. In this age of merger mania, this practice will allow you to track accounts accurately, even though business names may change.

Tip 5: Use numerical primary keys. In many accounting packages, you can use the customer or vendor name as the key. This is not a good idea, because it's possible to get two customers or vendors with the same name. Most programs allow automatic generation of primary keys as an option. This is usually the best way to go. If you decide to develop your own primary key number scheme, don't make it complex.

For example, let's say you assign a new account a number of 31012, because "31" signifies electrical supply houses and "012" is the twelfth company added to the system. With this format, you still have room to add 978 more companies. The rule of thumb for developing these schemes is "Simpler is Better."

Tip 6: Turn on the correct modules. If you have a multi-state payroll, you'll need to turn on the module for the state(s) other than the one your business is in. Major developers of financial software have the respect of the IRS. In an audit or investigation, the IRS won't question calculations these programs perform. That is not to say the IRS won't question the information you feed these programs. You still need to be careful about entering information. You also need to avoid using manual over-rides. If you do use manual overrides, have a CPA audit the results and advise on a less risky approach.

The IRS may know of a quirk in the program and make an adjustment, but they usually won't penalize you. However, if you fail to set up the necessary modules for payroll taxes, the IRS will not allow you to blame the software. Their normal course of action is to demand immediate payment of the taxes owed, in addition to penalties. Accounting programs will protect against this problem, if you use them properly. Any CPA can review your system and tell you if you have the correct modules turned on and working properly.

Tip 7: Get a third-party review. Accounting software does not change accounting requirements. You still need a third party review or audit. Have an independent auditor "review your books" at least once each year. If your accounting system is new or your transactions are complex, you may need more frequent audits. Foregoing an audit could be the most expensive mistake you'll ever make. Because you are using software, your audit will be easier and less expensive than it would otherwise; so don't think of an audit as prohibitively expensive.

You can find an accounting firm in the Yellow Pages. It may conduct an onsite audit or audit your files electronically. Ask two or three CPAs for their recommendations based on your particular situation. If you are setting up a generic accounting system, find firms that will make an onsite visit to audit your initial setup. If you are buying a customized package, you may get this kind of support from the vendor.

Tip 8: Back it up. Is your information safe? You could inadvertently wipe out your files, or a hard drive could fail. To offset these concerns, perform regular backups to a removable medium.

One business backs to a different tape for each day of the week. It makes daily backups of critical data to removable disks that it takes to a vault across town once a week. This business also burns its own CDs after a monthly audit. Further, it uses an Internet-based backup service that allows the data to survive even if a tornado or flood wipes out the county. And it runs the system on NT Server 4.0, which allows the staff to make mirror disks. Thus, when anyone saves a file, a copy of that file automatically appears on a set of backup hard drives. Not everyone needs all the layers of backup given in this example, but most businesses typically run with insufficient backup. If you buy two of the removable hard drives on the market today, you'll probably be OK.

Tip 9: Provide security. What kind of security do you need? Use passwords for the computers. Change passwords routinely. Don't allow text-only passwords, and make them at least six digits. If you use any of the 26 letters and 10 numbers (0 - 9), you have 36 possibilities for a one-digit code. With two digits, you have 36 possibilities squared, or 1296. With six digits, you are at 36 to the 6th power, which gives you nearly 2.2 billion possible combinations. This adds considerable work for any hacker.

Keep accounting systems in a room that has stout doors and locks to prevent easy access after hours. You may even choose to install an alarm system with remote monitoring. Place a paper shredder in that room, and use it. If your accounting system ties into a network, consult a network security expert for advice. If your accounting system resides in a computer that has a modem, remove the modem or put the data in a different machine.

Hackers can dial into a computer's modem and gain access to the hard drive. A modem-enabled computer is "outside the firewall," and much more vulnerable to attack than is a computer that is part of a network inside a firewall.

Tip 10: Carefully spread the wealth. Accounting software is not hard to use. Everyone with financial responsibility needs to know how to get information from your system. Thus, when that angry customer calls and "the accounting person" is at the dentist, you can still look things up.

There's another reason you need more than one person working on your system: internal control. Do not entrust your accounting to one person. At the very least, do not let people who enter accounts receivable also enter accounts payable. It's too easy for such a person to create fake accounts and write unauthorized checks.

Putting it all together. Approach your accounting software as you would any other project. Make a plan, work your plan, assign responsibilities, and stay informed. As you go through the process, you'll probably come up with your own tips. Keep a log of these, and share them with others who use the accounting system. Just remember: Your accounting software should make your job easier.