This article describes the bookkeeping process, whether it is performed by bookkeepers, accountants, or small business owners. Bookkeeping and accounting include steps from recording transactions to preparing financial statements. The bookkeeping process is much more efficient when you use automated accounting software.
Bookkeeping and accounting
Experienced bookkeepers can close the books, prepare financial statements, analyze them, and get ready for tax time. Accountants may supervise bookkeepers and prepare some of the more complex journal entries. Supervisory accountants would review the financial transactions, journal entries, and financial statements, including the balance sheet, income statement, and statement of cash flows for accuracy. CPA firms may review or audit the financial statements, especially when required for obtaining financing or providing financial information to investors. (link to Zar Money accounting basics and cash flow articles)
Create a standard detailed closing calendar that lists tasks, persons assigned, and deadlines. Regular monthly closes use the same steps. Some additional steps are added for the year-end close. Creating and distributing this closing calendar will ensure that the required steps are taken each month and will establish accountability.
Part of bookkeeping and accounting is establishing proper internal controls to prevent fraud and improve the accuracy of the books. Internal controls can be implemented through a separation of duties between recording transactions and handling cash receipts and disbursements, including cash, checks, or disbursements made through online banking transactions. For better internal control, someone who is not handling the cash is assigned to reconcile the bank account to the general ledger. Very small businesses may not have enough employees to establish good internal controls. If not enough bookkeeping or accounting staff members are available to provide the required separation of duties, the business owner should review cash receipts, vendor invoices, and disbursements, and reconcile the bank account.
The accounting period
The income statement includes transactions for the accounting period of an entire (twelve-month) year, whereas the balance sheet is a snapshot at the ending date of one or more periods presented in the financial statement. (The Statement of Cash Flows is covered in a separate Zar Money article. (link) For its accounting period, a business can either use a calendar year-end or choose a different fiscal year-end, such as a month with lower inventory balances or business activity. As an extra step for the company’s year-end, zero out income statement accounts to a retained earnings account on the balance sheet. This zeroing step will result in the next year’s accounts only capturing that year’s activity in the accounting records and financial statements.
Comparable financial statements
Prepare financial statements on a monthly and yearly basis, showing comparable results for the same period in the prior year. Financial statements may also show results summarized by (three-month) quarters.
Record transactions with double entry bookkeeping using balancing debits and credits. (link to Debits and Credits ZarMoney article) Use your chart of accounts with numbers and accounting descriptions to code these transactions. (link to Chart of Accounts ZarMoney article)
Accrual or cash basis accounting
Accrual accounting, which is preferred for financial statements presented on a generally accepted accounting principles (GAAP) basis, is different than cash basis accounting. In accrual basis accounting, revenue is recorded when earned (such as the delivery of products or performance of services and contract obligations recognized over time) and expenses are recorded in the same accounting period as revenue under the matching principle. In cash basis accounting, the accounting transactions are recorded when cash is received. (Link to ZarMoney Accounting Basics article)
Under accrual accounting, there must be a proper cut-off of transactions to record them in the accounting period to which they relate. For example, you may look at shipping and receiving information and invoices for disbursements for a certain number of days after each month-end. Then record those transactions that relate to that month for which the financial statements are being prepared. You record these through journal entries. Set up automatic adjusting journal entries (and next month reversals) in the software system for recurring transactions such as allocating prepaid insurance to the month to which it belongs. If you receive all or partial payment before revenue is earned, record it as a debit to a Cash account and a credit to Deferred revenue (or Unearned Revenue) through a journal entry. Record a debit to Deferred Revenue or Unearned Revenue and a credit to Revenue as the revenue is earned under accrual accounting.
When setting up your accounting system (before tax time), consult your CPA firm for advice on using accrual or cash basis accounting for accounting and financial statement preparation. These accounting methods will produce different taxable amounts for the tax return.
Account and bank reconciliations for increased accuracy
Reconcile underlying balances monthly to the general ledger, including cash per bank account statement, accounts receivable aging, prepaid assets, fixed assets, inventory, accounts payable aging, etc. Reconcile your bank accounts monthly too. Accounting software has automated features to help you reconcile bank accounts to your cash accounts balance in the accounting system very efficiently.
How does automated accounting software change bookkeeping?
Manual bookkeeping systems without accounting software require recording all transactions, then manually posting them to journals and the general ledger. With accounting software, there is an automatic posting of transactions to detailed journals and the general ledger. Financial statements are automatically created. When you record sales transactions on credit, the accounts receivable detail is automatically recorded by the customer and invoice through the accounting software. The accounting system will automatically generate accounts receivable aging report to help you understand collection status by the customer, invoice, and total for 0-30 days, 31-60 days, 61-90 days, and 91-120+ days outstanding classifications. You can also search the accounting system by inquiry on a real-time basis to determine outstanding invoices and balances. Cash disbursements are automatically recorded in the accounts payable account and detailed accounts payable aging reports. Detailed inventory and fixed assets records are used to prepare automatic reports. As stated earlier, standard adjusting journal entries and reversing entries at the beginning of the next month can be set up in an automated accounting system.
Bookkeeping and accounting processes are described in this article and other ZarMoney articles, online support for users, FAQs, and videos. Using automated accounting software greatly increases your bookkeeping efficiency.