“No matter how well a model is set up, if the inputs used aren’t accurate then the output won t be accurate, either.”1
Scenario: You just started a business. You took an accounting class in college. You want to save money. You have a QuickBooks account. There are negative numbers on the financial statements.
“Being cheap is very expensive”. The less organized your books the more time it takes an accountant to prepare the financial statements thus charging more (see Things Your CPA Will Not Tell You). Even if it is just once a year hire a bookkeeper (certified) to clean up your books before filing taxes and most importantly make sure to reconcile the end-of-year account balances to match the tax return.
As a business owner, you are focused on providing quality services or products to your clients and all that entails (e.g. marketing, networking, managing inventory, employees, etc) many decisions depend on understanding the state of your business. Is my business growing over time? What are my recurring monthly expenses? In what months does business slow down? Do I have enough cash to pay my fixed expenses during the slower times of the year? Accurate and timely information can aid in decision-making. This is why high-quality bookkeeping is essential.
Purpose:
To prevent Fraud
To ensure the accuracy of financial reporting for:
Loan Approval
Government Grants
Investors
Audits
Budgeting & Forecasting Decisions
To tie transactions to source documents (i.e. bank, credit card, loan statements, invoices, bills, receipts) in case of an audit:
Ensure all transactions are recorded
Eliminate duplicate transactions
Ensure all products/services are correctly marked as taxable or nontaxable
Ensure Accounts Receivable, Accounts Payable is up to date in order to make accurate Cash Flow Management decisions or Forecasting predictions
To track Inventory in real time to discover theft, obsolescence, or damaged products.
Ensure all loan principal and interest payments are recorded correctly
Ensure Sales Tax and Payroll Tax liabilities are recorded correctly and paid on time
Ensure Fixed Assets are recorded correctly as either an asset or expense
To tie the end-of-year statements with filed tax return
History:
Initially, accountants in the U.S. used to offer bookkeeping as a part of their services and tax preparation as a bonus. Somewhere along the way, accountants became hyper-focused on preparing taxes and began treating “bookkeeping” as a separate skill outside of accounting. Bookkeeping classes used to be offered in high school much like trade skills but sometime during the 1970s(?) or early 1980s(?), colleges, and universities advocated for the government to push the next generation of kids towards what used to be very cheap higher education.
As bookkeeping became a separate profession, bookkeepers’ wages stagnated. These low wages diluted this profession over time. Today there are many individuals that say they are bookkeepers but few with the required knowledge of both bookkeeping and accounting. In the last few years, the accounting profession has also had an inability to retain accountants because of the over-reliance on tax return preparation as a means to make money thus overworking new accountants for very little pay.
My approach is to go back to the original way to service clients by encompassing all accounting and financial management services. I do not want to overwork myself, my staff or stress. I cannot handle all tasks myself. I recognize my skills and those I lack and seek an expert.
Common Pitfalls:
Hiring family to prepare the books
I have tried to clean up books prepared by family members. the books are always messy, using either paper record-keeping or manually adding transactions to a bookkeeping software like QuickBooks Online. No checklists, procedures, or policies are followed. When I ask for source documents, the business owner gets defensive, the bookkeeper [e.g. sister, sister-in-law, ex-wife (yes!)] gets defensive and the work stalls. Business owners in this situation wait until the extension date, audit, or government report (non-profit) is looming and try to hire someone else to clean up their books. They are usualy stressed and angry and undersirable clients.
No Segregation of Duties
Allowing one person too much access; having one person prepare the books, the payroll, and pay vendors and bills.
A bookkeeper should have no access to any cash account (except Petty Cash, maybe) including bank and credit card accounts. Access should be limited to statement retrieval only.
Improper Record-Keeping Procedures/Policies
“The proper assignment of personnel, adequate record-keeping procedures, and independent internal verification of information in the records are useful controls… The client should also have well-defined policies.”1
Improper Internal Controls
“Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. Most companies have these systems in place, but many have never completely documented them.”1
“Recently, 424 companies reported deficiencies in internal control. Many problems involved closing the books, revenue recognition deficiencies, reconciling accounts, or dealing with inventory.” 1
Bookkeepers should not have permission to make payments. Bookkeepers should only be recording payments based on documentation.
No one person outside of the owners should control the record-keeping, payments, and payroll duties. These should be three different positions.
How to Hire a Bookkeeper
I have attached two bookkeeping tests-
The first test is a Basic Bookkeeping Assessment, with 25 True/False questions, medium difficulty level
The second quiz contains 5 multiple choice questions
Most certification tests require at least 80% to pass. I would use this as your criteria too.
Bibliography
1. (Kieso, 02/2011)Kieso, D. E. (2011). Intermediate Accounting, 14th Edition. [[VitalSource Bookshelf version]]. Retrieved from vbk://9781118233641
