Four Symptoms Your Small Business Accounting System Doesn't Work
Sometimes, people know their accounting systems don’t work. And they don’t care. But, sadly, sometimes, the struggling small business person doesn’t even know his or her system isn’t working until it’s too late. Until the business fails because the owners don’t realize they aren’t making money.
Fortunately, perhaps surprisingly, you can usually tell pretty quickly whether an accounting system like QuickBooks, Peachtree Accounting, or Microsoft Small Business Accounting works the way it should. Just look for one or more of the following four symptoms.
Symptom #1: You Don’t Know How Much Cash You Have Right Now
Any accounting system, run right, tells you how much money you have in your bank accounts. To the penny. Accordingly, if you can’t look at a bank register in your accounting system and see how much money you have, sorry, your system doesn’t work.
Symptom #2: You Don’t Know How Much Money You Made Last Week, Month or Year
Here’s another symptom of things gone bad. With just a few clicks of your mouse, you should be able to produce an accounting report called a profit and loss statement that tells you whether you made money last week, last month, last year, and so on.
A profit and loss statement simply summarizes the revenues and expenses of a business for an interval of time and then shows the difference between these subtotals—which is your profit or loss.
Now, this instant access to profit and loss information wasn’t always the case. In the past, people often waited until the end of the month or even the end of the quarter to send off their financial records to an accountant or bookkeeper. A few hours or a few days later, the bean counter produced a financial statement that showed whether or not the business had made money.
No more. If you’re doing your accounting right using something like QuickBooks, you should almost always be able to see whether you’re making money or not. And at almost any moment in time. That’s the point.
Symptom #3: You See Goofy Numbers on Your Balance Sheet
The first two symptoms are pretty obvious, I guess, but the third symptom is sometimes more subtle…
Turns out you can sometimes produce a profit and loss statement that sort of looks right--even if it sometimes isn’t. If you can produce a balance sheet that doesn’t have goofy numbers, though, that’s more telling. You can’t fake a balance sheet. Accordingly, carefully check out your balance sheet report.
A balance sheet lists assets, liabilities and owner funds invested or reinvested. If you don’t see goofy numbers on your balance sheet and your profit and loss statement looks right, you accounting system is probably capturing data in the right way.
Goofy balance sheet numbers include things like a big negative bank account balance, clearly incorrect accounts receivable or accounts payable balances, and any other accounts with strange names or balances.
Symptom #4: You Get Lots of Adjusting Journal Entries from Your CPA
Many accountants prepare a handful of end-of-the-year accounting entries for their small business clients. I often do this, for example, when I prepare a small corporation’s or small partnership’s tax returns.
Now don’t get me wrong. Preparing a handful of accounting entries is expected. Especially for amounts you can’t easily calculate—such as tax return depreciation.
If, however, your accountant or bookkeeper is making many other adjustments, you should verify that the accountant isn’t adjusting accounts at year-end because you’re not regularly tracking the account as you go through the year.
Heaven help you, for example, if your poor accountant finds himself or herself adjusting your cash accounts (this means you don’t know how much cash you have—which is of course symptom #1 above) or making large adjustments to any other accounts such as inventory.
Large end-of-year adjustments means your accounting system means just one thing: The books aren’t up to date with the financial realities of your operation. This lack of up-to-date information, sadly, means you may be flying blind.
Seattle CPA Stephen L. Nelson wrote the bestselling book QuickBooks for Dummies. He also edits the Do-it-yourself limited liability company LLC formation and the Do-it-yourself subchapter s corporation web sites.