I recently published a post on "My Books Are A Mess". In this post I will address how can you get accurate and meaningful reports to manage your business and also how can your bookkeeper check their work to make sure it is accurate. Everyone wants to produce good work and being empowered to identify problems and fix mistakes will enable your bookkeeper to become proficient at their work and take pride in it.
How the Problem Happens
First, realize that even accountants aren't immune accounting errors. Years ago, in corporate accounting, part of my responsibility as a financial analyst was to make sure the accounting was correct from period to period. So I learned how to spot problems and figure out what the cause was. The interesting thing was that those doing most of the entries were college educated accountants. It is not surprising that they or anyone else would make a mistake but it is shocking that they did not catch their mistakes and just downright dumbfounding when they made the same errors over and over again. So if degreed accountants struggle with proficiency, you know bookkeepers have the same struggle.
The thing with bookkeepers, in most cases, they were basically taught to make entries regarding the bank account, accounts payable and maybe accounts receivable but not (usually) how to check their work. Surprisingly bookkeepers for the most part also don't use financial statements and many don't even know what they are and fewer still understand what they mean. So let's fix that.
To help bookkeepers and business owners to get accurate and meaningful reports from their bookkeepers work I will consider what the financial statements are, what they mean, and finally how to use them to check the bookkeeping. In this post we will start with the Income Statement.
What It Is
The Income Statement, referred to as a Profit and Loss Statement in Quickbooks, should tell you how much the business made or lost during a particular period. It should report separately how much revenue was generated, how much it cost to produce the goods sold, and what the business operating expenses were. So if your business makes something that it sells the profit and loss should contain three sections, the Revenue, the Cost of Goods Sold, and the Operating Expenses. The Revenue less the Cost of Goods Sold is the Gross Profit. Gross Profit less Operating Expenses produces Net Income Before Interest and Taxes. Net Income After Interest and Taxes is the final profit for the period after everything is included.
How to Review the Income Statement
When the bookkeeper is done with their entries for a period they should take a look at the Profit and Loss Statement and see if it makes sense. Also, in Quickbooks, they will want to make sure all the categories look correct. You do not want to see any nasty unaccounted for items like "Unapplied Cash Payment Income" or "Unapplied Cash Bill Payment Expense". These would be entries you need to clean up so that they show up in the correct categories.
After reviewing for those nasties, now you, the bookkeeper, want to see if what you entered makes sense. You should have an idea from what you entered if the amounts by category make sense. You may need to ask the business owner or managers to take a look at the report and ask them if the report appears correctly. Also, this is a process and in the beginning you are learning and that is expected but you have to have a desire to get it right. So at this point you both want to get the accounting correct but you also want to gain an understanding of what is happening in the business and how you should account for it and how it should be reflected in the financial statements.
What To Do If You Are Not Sure Where To Code Something
As you make your entries you might not be sure where, to which accounts, entries should be coded. For those entries put them in a "Suspense" or "Ask the Accountant" account and then check to see where they should be coded. Don't be afraid to ask. Your accountant will be worried if you don't ask them questions. Then over time, with your learning process, the entries you have to ask about will become fewer and further between.
Analysis of the Income Statement
What really helps to identify miscoded entries to look at period (perhaps monthly) results vesus the prior period total by category and percentage of total sales for each category. For businesses that are consistent this is very helpful. For businesses that have results that vary based on the jobs worked during that time you may be able to get a feel for Revenue and Expenses on a per job basis if you can get the total number of jobs completed. If the business budgets revenue and expenses by the job you can compare actual versus the budget. If the business does not budget expected revenue and expenses per job perhaps you can initiate its development. With a budget you can compare the actual results versus the budget and give management/owners an idea of how the company performed versus expectations. What we have considered here is an analysis of variances. Here you are looking for how the results varied from another period or compared to the budget and determining if the reported results make sense.
Both for businesses with operations that are consistent and those that very a lot from period to period you, the bookkeeper, have to get a good feel for what actually happened during each period. It really helps to talk to the people involved in the operations on a regular basis. If there are operations meetings ask if you can attend. As you hear people in the company talk about what is happening you should be able to tell how that will affect the Profit and Loss Statement. In time you will get a handle on what is going on and you should be able to use the Profit and Loss Statement to tell the story of what happened during that period. When you can do this your value to the business increases dramatically.
Using The Income Statement To Help The Company
When the owners and managers start asking you what was the result of increased spending in a certain area then you know you have reached a high level of competence and value. Then you can help analyze what works in the business and what does not. Also, you can then bring potential problems to the owners and managers attention and become part of the solution.
Helping Businesses Do Their Books "In House"
You may be able to get powerful information you can use to manage your business without hiring a full-time accountant or paying a CPA to do your bookkeeping. Instead I could work with and train your bookkeeper to get those powerful reports you need and also help you use those reports to make a difference in your business results. Many business owners want to do their own books or pay someone a lot less than they pay their CPA to do their books and I want to help you do that. In many cases you should be able to do that. However, there are many problems that can and do come up and it is my mission to help business owners to deal with these issues so they can do their books "in house" and effectively use the period results to manage their business.
I would be happy to work with you and your bookkeeper to improve your bookkeeping to get financial statements that you can use to effectively manage your business. If this interests you please feel free to contact me using my information below.
Contact the CPA Superhero for help with your business and your life goals. I consult with or coach business owners to manage and grow their business and develop strategies. Additionally, I prepare tax returns for business owners. For over thirty years I have worked with many different successful and unsuccessful business owners and that experience has given me unique insight that you can tap into as one of my clients. So contact me today to setup an appointment to talk about your business and your life goals.
Jeff Haywood, CPA
The CPA Superhero
Certified Quickbooks ProAdvisor
The CPA Superhero
Certified Quickbooks ProAdvisor
The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.