Accurate books are the lifeline of any successful small business. They help keep track of monies, control costs, and help in better financial decisions. For example, a business that tracks income and expenses clearly in a detailed manner will have know the major expense heads and key revenue streams. This can help decide which costs to cut in a slowing economy and which revenue streams to push. For e.g. service revenues in a product business is usually small but highly profitable. In times of recession, when profitability is more important than growth, this insight could be valuable.
I have listed some basic checks that every accountant or owner should do on the books of their companies. Most of the suggestions are specific to QuickBooks but would be valid on other small business software too.
Chart of Accounts
-Check if the number of accounts (income and expense) is appropriate. Usually businesses have too many expense accounts tracking the same expenses. This leads to duplicate entries, inconsistencies and a very fragmented expense structure.
-Before creating a new account to track an expense, perform the frequency and amount test. If the expense is a frequent one, then it needs a separate account. Conversely if the expense is an infrequent one but a large one, then track it through a separate account.
-Check if undeposited funds equal deposits (cash) in hand. If they are off by a large margin, then customer receipts, expense payments and deposits into bank need to be studied in detail
-QuickBooks creates an opening balance equity account when you set-up a new file. This account should be around zero as it is just a clearing account
Items set-up (relevant for QuickBooks)
-No. of items are suitable- check for inactive items
-Items have been classified logically for easy management. All inventory item types of a particular kind are grouped together
-Two sided items (items that occur in a pair, one affecting the income account and other an expense account) have been set up correctly. For e.g. items that track freight in and freight out expenses
-Inventory items need to be carefully reviewed so that they link with the right income, expense and inventory account
-Sales tax items use the correct agency and use the correct sales tax code
Balance Sheet
-Year-end balances have to tie in with the last years tax return
-Account receivable balances should match up with the AR aging report
-Account payable balance should match up with the AP aging report
-Bank balances match up with the reconciled bank balances
-Bank Liabilities like credit lines, loans should match up with the loan statements
-Study any Prepaid asset amounts that have not changed at all in through the year
-Negative capital/equity balances should be carefully scrutinized for incorrect journal entries
Profit and Loss (P&L)
-Monthly sales analysis of spikes, down-falls and seasonality of sales numbers-variations should be explainable
-Sales by Item and Sales by Customer ties in with the sales in the P&L statement
-Look out for abnormally high Gross Margins- this could either be because most of the expenses are non purchase related (hence Cost of Goods Sold values are low) or due to missing data
-Expenses can be summarized for meaningful analysis. Highly fragmented expense structure(too many expense accounts) makes expense summarization difficult
-Compare payroll expense against payroll tax expenses
-Negative expense items like vendor discounts can be recorded as income account. This is not mandatory but preferable.
Sales Tax Liability Report
-Sales tax payable balance matches with those in Balance Sheet
-Total Sales reflected in sales tax report matches with total income in P&L
Inventory
-Look out for negative on hand quantity balances across different items. This indicates stock-out of items. If your business allows back-orders, then there could be negative inventory items (as items could be sold before they are purchased). This is usually not the norm even in a system that has lot of back-orders
-Average cost of inventory needs to be correct. This is auto-calculated by QuickBooks (based on sales and purchase transactions for that item). So an incorrect average costs may suggest a lot of short-selling of items
This is just a partial list of checks that can be done to ensure health of your books. Further depending on the industry/sector, the checks and reports would have to be customized. Most of these checks can be easily done by a qualified accountant but may not be done by a semi-trained, part-time office assistant. Some of the critical tasks do require a good understanding of principles of accounting. Many small businesses can not afford qualified accountants and hence end up comprising on the health of their books.
However, the growing popularity of accounting outsourcing offers a solution. Accounting outsourcing helps businesses maintain an accurate set of books at a reasonable cost. By using outsourcing accounting services, you can work with skilled but economical offshore accountants working under a qualified CPA. It does have challenges but they are manageable if outsourcing accounting is planned well. Go ahead and explore this popular concept!!
I have listed some basic checks that every accountant or owner should do on the books of their companies. Most of the suggestions are specific to QuickBooks but would be valid on other small business software too.
Chart of Accounts
-Check if the number of accounts (income and expense) is appropriate. Usually businesses have too many expense accounts tracking the same expenses. This leads to duplicate entries, inconsistencies and a very fragmented expense structure.
-Before creating a new account to track an expense, perform the frequency and amount test. If the expense is a frequent one, then it needs a separate account. Conversely if the expense is an infrequent one but a large one, then track it through a separate account.
-Check if undeposited funds equal deposits (cash) in hand. If they are off by a large margin, then customer receipts, expense payments and deposits into bank need to be studied in detail
-QuickBooks creates an opening balance equity account when you set-up a new file. This account should be around zero as it is just a clearing account
Items set-up (relevant for QuickBooks)
-No. of items are suitable- check for inactive items
-Items have been classified logically for easy management. All inventory item types of a particular kind are grouped together
-Two sided items (items that occur in a pair, one affecting the income account and other an expense account) have been set up correctly. For e.g. items that track freight in and freight out expenses
-Inventory items need to be carefully reviewed so that they link with the right income, expense and inventory account
-Sales tax items use the correct agency and use the correct sales tax code
Balance Sheet
-Year-end balances have to tie in with the last years tax return
-Account receivable balances should match up with the AR aging report
-Account payable balance should match up with the AP aging report
-Bank balances match up with the reconciled bank balances
-Bank Liabilities like credit lines, loans should match up with the loan statements
-Study any Prepaid asset amounts that have not changed at all in through the year
-Negative capital/equity balances should be carefully scrutinized for incorrect journal entries
Profit and Loss (P&L)
-Monthly sales analysis of spikes, down-falls and seasonality of sales numbers-variations should be explainable
-Sales by Item and Sales by Customer ties in with the sales in the P&L statement
-Look out for abnormally high Gross Margins- this could either be because most of the expenses are non purchase related (hence Cost of Goods Sold values are low) or due to missing data
-Expenses can be summarized for meaningful analysis. Highly fragmented expense structure(too many expense accounts) makes expense summarization difficult
-Compare payroll expense against payroll tax expenses
-Negative expense items like vendor discounts can be recorded as income account. This is not mandatory but preferable.
Sales Tax Liability Report
-Sales tax payable balance matches with those in Balance Sheet
-Total Sales reflected in sales tax report matches with total income in P&L
Inventory
-Look out for negative on hand quantity balances across different items. This indicates stock-out of items. If your business allows back-orders, then there could be negative inventory items (as items could be sold before they are purchased). This is usually not the norm even in a system that has lot of back-orders
-Average cost of inventory needs to be correct. This is auto-calculated by QuickBooks (based on sales and purchase transactions for that item). So an incorrect average costs may suggest a lot of short-selling of items
This is just a partial list of checks that can be done to ensure health of your books. Further depending on the industry/sector, the checks and reports would have to be customized. Most of these checks can be easily done by a qualified accountant but may not be done by a semi-trained, part-time office assistant. Some of the critical tasks do require a good understanding of principles of accounting. Many small businesses can not afford qualified accountants and hence end up comprising on the health of their books.
However, the growing popularity of accounting outsourcing offers a solution. Accounting outsourcing helps businesses maintain an accurate set of books at a reasonable cost. By using outsourcing accounting services, you can work with skilled but economical offshore accountants working under a qualified CPA. It does have challenges but they are manageable if outsourcing accounting is planned well. Go ahead and explore this popular concept!!
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