Episode 12 – The 5 most common errors made in Computerized accounting
Welcome once again to the podcast! And thanks so much for tuning in! As always, I’m Paul Rosenblum. Today’s episode is getting back to basics about the task of bookkeeping. Today, let’s discuss the 5 most common errors made in computerized bookkeeping in general (not just QuickBooks Online or QuickBooks desktop). But before we get to the topic at hand, here’s a quick general recent history of bookkeeping and accounting.
The most radical change in bookkeeping in the last 50 years has been going from manual hand-written general ledger bookkeeping, which took at the very least an entire large kitchen table, with a paper general ledger being spread out on it. Now, bookkeeping is done on a computer screen, or a tablet, or even a phone when you’re on a train going to a friend’s house, or on a beach as long as you have internet access.
My love/hate relationship with Intuit (the makers of QuickBooks) the past 27 years started with the idea that they have always marketed their product as ‘easy to install’ for the desktop, and ‘easy to use’, and ‘you’ll be up and running within 15 minutes’. Of course, they wanted to sell software-- which they did by the boatloads in the United States. They are not nearly as popular in any other country around the world as they are in the U.S.
They marketed their software to business owners as well as to the general public. Administrative assistants and receptionists started using QuickBooks desktop software to enter bills for their bosses or departments to keep track of expenses for the company. Many years ago, one of my clients at a health care facility started using QuickBooks in one of the departments just for expenses to be reported and paid by the general Accounts Payable department. Business owners were convinced that it was easy for anyone to learn and use. I can attest to the fact that this isn’t fact. This is why I have taught QuickBooks for 27+ years and the first several years to filled up classrooms of 25-30 people a class.
It also caught on with accountants, tax preparers and people who were starting in bookkeeping, many of them who had no formal training in bookkeeping or accounting. This is why in my years of teaching QuickBooks, I not only taught the software, but also have always taught some accounting basics in every class that I have ever taught. QuickBooks caught on quickly and it was and still is the #1 bookkeeping software in the United States.
However, manual bookkeeping is one thing. One always used a non-erasable pen to enter transactions, and if there was a wrong transaction entered, an additional transaction was made to correct the previous one called a ‘reversal entry’. But with computerized accounting, one of the things that was introduced was the ‘DELETE” button on a computer keyboard. Once a transaction was entered, there was an easy way of deleting it now or years from now if it was an incorrect entry. The rules changed. Then QuickBooks desktop introduced ‘downloading’ the bank and credit card transactions from the banks directly. That Changed the rules again. When QuickBooks online was introduced, it was designed from the bottom up to download from everywhere -- banks, credit cards, and third-party credit card merchants like Stripe and Square. I interviewed a prospective client a few years ago, and he showed me how everything -- every transaction from all the sources, was being downloaded into QuickBooks desktop. He was so proud of that fact and he was so proud of the fact that it was set up by him. There was very little that the bookkeeper needed to do (according to him) (In theory). He said that he would expect his books to be done by the 4th of every month. I asked him what he needed me for. I don’t remember his answer, because I had already written off taking him on as a client.
Now that I’ve ranted about computerized bookkeeping, here are the 5 (in no particular order) most common errors made in computerized accounting today.
- Downloading bank and credit card transactions and getting double entries as well as not handling deposits correctly:
- When you download bank transactions for a particular month, you are downloading all deposits, and all withdrawals, including payments to credit cards.
- When a deposit is downloaded, in general, most banks don’t supply the graphic of the deposit slip and the checks that were part of that deposit (However, I’ve seen Wells Fargo starting to do that in their downloads recently). I’ve seen firsthand that most bookkeepers assume that deposits are sales or income for the company. No! ***Sound affect*** NOT TRUE!
- If, for an example, there is an IRS income tax refund or money that came in as a loan from an individual or a bank, that should not be considered as income, in both of those examples, those transactions would be on the balance sheet (Unless it was a state corporate tax or a payroll tax refund). For an incoming loan, that transaction is considered a liability of your company. It’s very easy to fall into a trap, when downloading transactions and forget that, and just accept all downloaded deposits as income rather than logging into the bank’s website and looking at every deposit. And yes, I practice what I preach -- I log in to the bank’s website every time I’m working on a set of books, and make sure that the deposits made are indeed income or revenue and not a refund of any kind and either print all the checks that were part of the deposits or write down the deposit information on the bank statement that I am working on at the time.
- When you download bank transactions, you are downloading credit card payments, as mentioned earlier. However, when you download the credit card transactions, you are downloading the credit card payment for a second time, this time, from the viewpoint of the credit card bank -- that is – it’s reporting that transaction as a credit card CREDIT against your account, and the bank is reporting it as a withdrawal from your bank account. In theory, those two payments from two different sources should match up automatically and combine into one transaction to avoid a double entry. But in reality, that works no more than around 70%. In many sets of books that I inherit from another bookkeeper or a business owner doing bookkeeping themselves, the QuickBooks balance in the books on the credit card is tens of thousands of dollars off from the real balance of the credit card. And it usually is a negative balance. This is because every payment to the credit card and every credit card CREDIT (that represent payments), are both entered, rather than combining them and entering one transaction. There are tax preparers who’d ignore this and just go by the profit and loss, but that doesn’t prove that the profit and loss is accurate. Computerized accounting introduces new and interesting bookkeeping and accounting problems that never existed before. Sometimes, I call it --- “The Price of Technology”. We just have to deal with it.
- Chart of Accounts AKA Categories
- The categories used on a tax form are generally different from a typical bookkeeping category (Chart of Account) list. As a new QuickBooks user, for an example, most people just follow the names of the accounts that are provided to you by the software manufacturer. In many cases, they are simply not correct. Meals and entertainment, for example, had changed in 2018 with the new tax law not including entertainment as a tax deduction any longer. But the category is still ‘Meals and Entertainment’ in most computerized accounting software. I’ve had conversations with high end people at the makers of QuickBooks, for one, explaining this to them, and their retort is – we provide the software --- “it’s up to you to tweak the names of the skeleton chart of accounts that we give you as part of the setup of the company file.
- On a prior episode of this podcast, I talked about the Chart of Accounts --- there is no 100% right here, but I have my way of wording the chart of accounts categories in a particular way that makes sense for my client and is workable for the tax preparer to convert the books to a tax return. The Moral here --- before you begin, tweak the names of the Chart of Accounts categories to what makes sense for you and your business. Not all businesses have the same exact categories.
- Reconciliations
- I’ve lost count on the number of books that I inherit from bookkeepers actually charging for their services, some more than I do, who have months if not years of bank accounts and credit card accounts and credit line accounts not reconciled.
- A reconciliation simply means matching up each entry made in your accounting system to each entry on a statement, together with the beginning balance for that statement and the ending balance as of the ending date of that statement. Each line item on the statement must match with the data entry or downloaded entry in the software.
- Every account must be reconciled at the end of every month or to the ending balance on that statement if the statement ends in the middle of the month. If not, your balance sheet and your profit and loss report could be inaccurate.
- Reconciliations also prove that every downloaded transaction is the same transaction for the same amount of money that shows up on the paper or PDF statement. I’ve seen where a paper statement had a check that was deducted for $412.72 but the downloaded transaction came in as $412.27, hence the reconciliation was off by 45 cents. Of course, I found it. If not, I wouldn’t be able to sleep that night. (Sorry, it’s a curse!) So, the servers at the bank that create paper statements aren’t necessarily the same servers that create the downloaded transactions into your accounting system.
- Entering all fields (or at least most fields available) on each transaction
- When I enter a check, I always put the Payer’s name, the date, and the amount of that transaction if I am entering that transaction manually. In many cases, I will also enter a short memo or description of that transaction if it is necessary. If I’m downloading that same transaction, I know, it’s so easy to not fill in the fields, but please! --- ‘fill them in anyway.’
- You never know at the end of the year what kind of reports you will need and the more information that you have entered into each transaction, the better.
- If you are entering a bank transaction that isn’t a check, such as a debit card or an electronic fund transfer (EFT), Use the check number or the reference number as the word ‘Debit’ or “EFT”. “Wire” would be used for a domestic or a foreign outgoing wire transaction. This way, you can report on only the Wire transactions or only the debit card transactions at the end of the month or the end of the year. It’s so tempting not to enter the vendor in the appropriate field (since the vendor’s name is downloaded into the ‘description’ field of the transaction, but leaving the vendor field blank will take away several vendor reports which you might need to use later. In other words, don’t think that just because you are downloading transactions, there is no typing or thinking involved. To do this accurately, good bookkeepers have to have a unique kind of focus and concentration, and if a bookkeeper has a form of Asperger’s syndrome, (now on the autism spectrum) it’s usually a plus. (You can look that up later or pause this episode now) 😊 If you haven’t gathered by now, I ‘don’t like shortcuts.
- And last but not least: Be very careful what you delete.
- By default, many computerized software systems are what I call an ‘open database’ -- that is --- once a transaction is entered, even if it’s proven and reconciled, it can still get deleted. (I don’t know why they do that!)
- In the episode on Audits, I talk about the importance of the books matching the tax return. I have had clients of mine going through the accounts receivable (money owed to your business by clients/customers), realizing that a two-year-old invoice to a customer will never get paid, and they just go ahead and delete that invoice from the system. If the taxes are done in accrual, and the books matched the tax return before the deletion, guess what? Now they don’t! **Sound effect** So, one of the first things that I do, is go into preferences or settings (different places in all software) and create a password that only you know (if you are the bookkeeper) so that no one can go back and delete an entry once taxes have been filed and the accountant’s year-end adjustments have been made in the books and the books match the tax return. In essence, you are locking the database. I’ve had clients who tried to delete an old invoice and called me and asked me for the password. My answer is: ‘Over my dead body’. I say that jokingly and then I explain that the transaction can’t be deleted since you are on an accrual basis, and I will fix it with a reversal accounting entry after you let me know exactly what the transaction is. If your business is on a cash basis, uncollected invoices are not counted in a tax return, so that it’s not a terrible thing to delete an old invoice. However (personally, I like to keep the invoice and just make it zero value).
I have had a few struggling clients who have told me that they can’t afford my services any longer, even though they know that they are getting a very lowball price and want to do their own bookkeeping. They still want me to go over the books at the end of the year, and make sure that they are right. Every time this happens, it takes me 2 to 3 hours to correct mistakes and make their books up to my standard. And of course, it’s three hours of my time that they have to pay for. I feel bad charging them, but hey, I have rent to pay too! Many people think bookkeeping is easy. You enter numbers, put them in categories, submit to the tax professional and Wah-Lah! Your taxes are filed. It’s like magic. ***sound effect** -- The truth is that It’s not easy to do it right.
Every business owner has their own priorities and philosophies with bookkeepers and bookkeeping.
- Bookkeeping is a necessary evil that has to be done; hence the business owner wants to keep the price way down to the absolute minimum.
- Business owners want to make money and run their business. They don’t want to be part of the bookkeeping procedures at all. I guess the bookkeeper has to be a mind reader to know everything that was purchased and what it means for the business. I don’t take on clients with those two ideas in their heads.
- Some business owners understand the importance of clean, accurate books using everything that bookkeeping software has to offer. They want to be available to the bookkeeper and be a small part of that process, including being available to track down W9 forms for 1099 purposes and to maybe keep them out of an audit situation.
And that leads me to the next episode which will be talking about bookkeepers building relationships with their clients. So, please subscribe, if you haven’t already done so, and join me for that. As I have mentioned, I will start interviewing business owners sometime in August, so stay tuned for that as well. Check out the Facebook group page, and if you have any comments about this episode or any others, please email me at Bookkeepermensch@gmail.com.
Thanks for listening. Until next time ---- have a great rest of your day. I’m Paul Rosenblum