Computerizing Your Accounting System

One of the most important tasks facing a small business is keeping watch over the money flowing into its coffers and out to its vendors, employees and advisors. Fortunately, today's full-featured-yet inexpensive-accounting programs allow business owners to track and manage every aspect their companies' finances. And by automating income and expense information, a business can reduce its accounting expenses and save its accounting firm time and effort.

"The key to managing a business is knowing how it's doing by keeping accurate income and expenses records," says Eugene A. Schnyder, a CPA and emerging enterprise consultant in Shushan, New York. Even a moderately successful emerging business, however, soon outgrows cash-drawer/checkbook recordkeeping. The cash balance at the end of the day doesn't tell how well a business is doing, nor does it help in making business decisions. In the past, accounting records were maintained by hand, in columnar ledgers, which involved tallying transaction totals at the end of each week or month. A computerized accounting system can track and analyze considerably more information than a manual record system-and with less effort.

John Eason owns and operates Southeastern Sales & Specialties Inc. and Advanced Distribution Technologies Inc., software development and distribution companies in Carrollton, Georgia. "A typical start-up company tends to rely on its owner's ability to 'keep the figures' in his or her head," Eason says. "As the company grows, the owner's time is diverted from his or her area of expertise and to the areas he or she is usually less capable or experienced in-accounting, collections, determining costs and so on. The single most important factor for most businesses is cash flow and the ability to manage it properly.
Most small-business owners don't know their true costs of doing business because they don't accurately track or monitor all the costs. They tend to discount their time and profits because of this. Small companies do the same things and need the same information as large companies. Selecting the proper accounting software can save most of the accounting costs incurred by a company and will give its banker confidence in the company's ability to provide proper, timely and accurate financial information."

LEARNING THE TERMS
To choose the right accounting software for your business, you should understand these basic accounting terms:
Asset-A tangible or intangible object of value to its owner.
Liability-An obligation to another party.
Income-Money received for goods or services produced or as a return on investment.
Expense-Money spent for goods or services.
General Ledger-The main records of the assets, liabilities, income and expenses of an organization.
Accounts Payable-A company liability; amounts due to suppliers of goods or services.
Accounts Receivable-A company asset; amounts owed for goods or services that have been supplied.
Capital-The net worth of the company; the assets less the liabilities.
Double-entry accounting-A system in which the total of all left-side entries is offset by an equal total of right-side entries. Left-side entries are known as debits, and right-side entries are known as credits. A debit or a credit can be applied to any general ledger account, whether it's an asset, a liability, capital, income or an expense.

FINDING THE SOFTWARE THAT FITS YOUR NEEDS
The best way to select an accounting program is to match your company's needs against popular accounting programs. A typical program will contain modules, or sections of a program, that cover particular accounts, such as accounts payable, accounts receivable, invoicing, inventory, payroll, banking and so on. The best software includes modules you can use to track your contacts and your schedule, to maintain a list of tasks and reminders and to perform mail-merges for form letters and labels.

Schnyder offers the following suggestions for choosing a suitable accounting software program:
Purchase an off-the-shelf commercial or shareware package rather than a custom program, because most of the bugs have already been removed. Most off-the-shelf programs also provide a good user's manual, a strong help system and support services.
Get a recommendation from your CPA. Also check with members of local business organizations and other small-business owners.

Look for software that's easy to set up. Some programs ask questions about your business and use the answers to create the first records and to enable features suitable for your business. A program should be easy to customize so you can select features appropriate for your business and remove features you don't need.

Consider software created specifically for your type of business. If you run a pet store, for example, look for a program that provides features for retailers or even specifically for pet stores. Shareware is the best source for business-specific accounting programs. For names and addresses of Web sites from which you can download share-ware programs, see the June 1997 "Computer Ease" column.
Schnyder also recommends asking yourself the following questions:
Does the software provide all the functions you need? For example, if your company maintains an inventory of supplies or goods produced, the program should include an adequate inventory-management system.

What monthly reports and journals does the program produce? Can you customize them for your business? Can you create new reports without too much effort?
As your business grows, can you easily move from your current software to a more advanced version?
You don't want to have to enter data more than once, so your accounting program should be able to share data with other programs on your computer. For example, look for a program that can import data from and export data to your spreadsheet program. Or if you want to insert financial reports into documents such as proposals or business plans, make sure your accounting program can export data to your word processor.
Can the accounts receivable, accounts payable, payroll, inventory and other modules communicate with each other and easily pass information back and forth?

"Accounting software should be completely integrated," Eason says. "Too many companies purchase an accounting package and try to 'marry it' to another program to make it complete. An accounting program should be true double-entry, interfaced with other modules (such as inventory, purchasing, sales order/invoicing and so on). A business needs to be able to keep track of all the operations it uses to perform its work as the work is being performed. I searched for an accounting package that contained most of the features and capabilities of the accounting systems I used when I worked for large companies."

USING THE INTERNET TO SEND AND RECEIVE FINANCIAL DATA

More and more clients and accountants send and receive data using the Web. Some accounting programs provide built-in Internet access, and accounting firms use client write-up programs to send and receive financial information to and from clients, banks and government agencies. "I believe the Internet and programs that utilize the latest technology are going to dramatically change the way accountants deliver service to small businesses," says Myron Joy, a CPA who operates Joy & Associates CPAs, PC, in Phoenix. "Using Internet connections, businesses will send financial information from their accounting programs to their accountants' offices for completion of traditional accounting functions. Then the accountants will arrange tax deposits and payments and download bank account information-all online. The completed financial reports and accounting data will be sent to the client via the Internet to his Web site or e-mail address. The efficiency of this type of delivery system will lower the clients' overall costs. Joy & Associates has developed ClientLink Write-Up, a program that gives the accountant the features to implement such a service." Other developers of write-up programs for accountants include Creative Solutions (http://www.csisolutions.com/),
Drake Software (http://www.drake-software.com)
UniLink (http://www.unilink-inc.com/).

BENEFITS OF A COMPUTERIZED ACCOUNTING SYSTEM
Computerized accounting systems are well worth the investment. Schnyder sums it up: "The initial entry of records into a computer accounting system is just as time-consuming as it is in a manual system. A byproduct of computer record-keeping, however, is the capability for analysis, accuracy and quick retrieval of searched-for records."
Contact Sources
Advanced Distribution Technologies Inc.,
http://www.the-information-age.com/business/adt
Joy & Associates CPAs PC, (602) 468-1284, http://www.joycpa.com/
Southeastern Sales & Specialties Inc.,
http://www.the-information-age.com/business/sss

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Payroll : Elements Of The Accounting System

If you've got employees, you've got to get a handle on payroll, payroll accounting can be quite a challenge for the new business owner. There are many federal and state laws regulating what you have to track related to payroll. Failure to do so could result in heavy fines-or worse.

Many small-business owners use outside payroll services. These companies guarantee compliance with all applicable laws. This keeps the small-business owner out of trouble with the law and saves valuable time that can be devoted to something else in the business.

However, if you choose to do your own payroll, it is highly recommended that you purchase an automated payroll system. Even if the rest of your books are done manually, an automated payroll system will save valuable time and help considerably with compliance. There's not a lot of margin for error when dealing with the federal government!

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

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Inventory : Elements Of The Accounting System

Unless you are starting a service business, a good inventory-control feature will be an essential part of your bookkeeping system. If you are going to be manufacturing products, you will have to track raw materials, work-in-process and finished goods, and separate subledgers should be established for each of these inventory categories. Even if you are a wholesaler or retailer, you will be selling many different types of inventory and will need an effective system to track each inventory item offered for sale.

Another key reason to track inventory very closely is the direct relationship to cost of goods sold. Since nearly all businesses that stock inventory are required to use the accrual method for accounting, good inventory records are a must for accurately tracking the material cost associated with each item sold.

From a management standpoint, tracking inventory is also important. An effective and up-to-date inventory-control system will provide you with the following critical information:

• Which items sell well, and which items are slow moving
• When to order more raw materials or more items
• Where in the warehouse the inventory is stored when it comes time to ship it
• Number of days in the production process for each item
• The typical order of key customers
• Minimum inventory level needed to meet daily orders

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Fixed Assets : Elements Of The Accounting System

Fixed assets is a elements of the accounting system, fixed assets are items that are for long-term use, generally five years or more. They are not bought and sold in the normal course of business operation. Fixed assets include vehicles, land, buildings, leasehold improvements, machinery and equipment.

In an accrual system of accounting, fixed assets are not recorded when they are purchased, but rather they are expensed over a period of time that coincides with the useful life (the amount of time the asset is expected to last) of the item.
This process is known as depreciation. Most businesses that own fixed assets keep subledgers for each asset category as well as for each depreciation schedule.
In most cases, depreciation is easy to compute. The cost of the asset is divided by its useful life. For instance, a $60,000 piece of equipment with a five-year useful life would be depreciated at a rate of $12,000 per year. This is known as straight-line depreciation.

There are other more complicated methods of fixed-asset depreciation that allow for accelerated depreciation on the front end, which is advantageous from a tax standpoint. You should seek the advice of your CPA before setting up depreciation schedules for fixed-asset purchases.

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Elements Of The Accounting System : Accounts Payable & Accounts Receivable

ACCOUNT PAYABLE

Whom do you owe? Keep track with the accounts payable ledger, The accounts payable subledger is similar to that used to track accounts receivable. The difference is that accounts payable occur when you purchase inventory or other assets on credit from a supplier.
It is important to track accounts payable in a timely manner to ensure that you know how much you owe each supplier and when payment is due.

Many a good supplier relationship has been damaged due to a sloppy accounts payable system. Also, if your suppliers offer discounts for payment within 10 days of invoice, a good automated accounts payable system will alert you when to pay to maximize the discounts earned.

ACCOUNT RECEIVABLE

Who owes you? Keep track with an accounts receivable ledger, If you plan to sell goods or services on account in your business, you will need a method of tracking who owes you how much and when it is due. This is where the accounts receivable subledger comes in. If you will be selling to a number of different customers, then an automated system is a must.

A good bookkeeping software system will allow you to set up subledgers for each customer. So when a sale is made on account, you can track it specifically to the customer. This is essential to ensure that billing and collection are done in a timely manner.

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Chart Of Accounts : Elements Of The Accounting System

The first step in setting up an accounting system for your business is deciding what you want to track. A chart of accounts is simply a list of your accounts and is kept by every business to record and follow specific entries. Whether you decide to use a manual system or a software program, you can customize the chart of accounts to your business.

Account numbers are used as an easy account identification system. For most businesses, a three-number system will suffice; however, a four-number system is sometimes used for more complex ventures. The chart of accounts is the fuel for your accounting system. After the chart of accounts, you establish a general ledger system, which is the engine that actually runs your accounting system on a daily basis.

The chart of accounts is the foundation on which you will build your accounting system. Take care to set up your chart of accounts right the first time. Keep your account descriptions as concise as possible. And leave plenty of room in your numbering system to add accounts in the future.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

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General Ledger - Elements Of The Accounting System

Whom do you owe? Keep track with the accounts payable ledger. every account that is on your chart of accounts will be included in your general ledger, which should be set up in the same order as the chart of accounts. While the general ledger does not include every single accounting entry in a given period, it does reflect a summary of all transactions made.

If your business is small and cash-based, you can set up much of your general ledger out of your checkbook. The checkbook includes several pieces of information vital to the general ledger-cumulative cash balance, date of the entry, amount of the entry and purpose of the entry. However, if you plan to sell and buy on account as most businesses do, a checkbook alone will not suffice as a log for general ledger transactions. And even for a cash-based business, a checkbook cannot be your sole source for establishing a balance sheet.

An important component of any general ledger is source documents. Two examples of source documents are copies of invoices to customers and from suppliers. Source documents are critical in that they provide an audit trail in case you or someone else has to go back and study financial transactions made in your business. For instance, a customer might claim that he never received an invoice from you. Your source document will prove otherwise. And your source documents are a required component for your accountant at tax time. Other examples of source documents include canceled checks, utility bills, payroll tax records and loan statements.

All general ledger entries are double entries. And that makes sense, because for every financial transaction in your business, the money (or commitment to pay) goes from one place to another. For instance, when you write your payroll checks, the money flows out of your payroll account (cash) into the hands of your employees (an expense). When you sell goods on account, you record a sale (income) but must have a journal entry to make sure you collect that account later (an account receivable).

The system used in recording entries on a general ledger is called a system of debits and credits. In fact, if you can gain even a basic understanding of debits and credits, you will be well on your way to understanding your entire accounting system.

As outlined above, for every debit, there should be an equal and offsetting credit. It is when the debits and credits are not equal or do not offset that your books don't balance. A key advantage of any automated bookkeeping system is that it will police your debit-and-credit entries as they are made, making it far more difficult not to balance. It won't take many 3 a.m. error-finding sessions in a manual system to persuade you to automate your bookkeeping system!

All debits and credits either increase or decrease an account balance. These basic relationships are summarized as follows:

Account Type

Debit

Credit

Assets	Increases	Decreases
Liability	Decreases	Increases
Stockholder's Equity	Decreases	Increases
Income	Decreases	Increases
Expense	Increases	Decreases

In a general ledger, debits always go on the left and credits always go on the right.
While many double entries are made directly to the general ledger, it is necessary to maintain subledgers for a number of accounts in which there is regular activity. The information is then taken in a summary format from the subledgers and transferred to the general ledger. Subledgers showing cash receipts and cash disbursements are pretty easy to follow. However, some subledgers, such as accounts receivable, inventory, fixed assets, accounts payable and payroll can prove to be a challenge in their daily maintenance.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

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