Monthly Archives: August 2011

Spousal bookkeeping: why I recommend divorce

Okay, so I don’t really recommend divorce.  But, with a spouse as bookkeeper, you as a business owner have some unique challenges to face. 

First of all, you can’t fire your spouse if they are incompetent.  And, they are quite likely to be incompetent.  No offense meant to your spouse.  In fact, most bookkeepers today are incompetent.  This is in large part due to the advent of accounting software, and more specifically to the dominance of QuickBooks in the accounting software market.

Before accounting software, there were bookkeepers, and there were spouses doing bookkeeping.  These spouses would have taken accounting and/or bookkeeping classes at a local college or university, or even self study classes.  They took these classes so that they would become competent bookkeepers and accountants.    Suppliers, bankers, creditors, and regulators all relied on accurate accounting information from their small business clients.  And, before on-line banking, the only way to know what was happening in the company bank accounts was to keep up to date records and to timely reconcile the bank accounts each month. So, the bookkeeper’s role and competence were critical to the success of the company.

Businesses today have the same stakeholders that they did 50 years ago:  lenders, creditors, suppliers, regulators, taxing authorities, owners, family members, etc.  They may even have a few more stakeholders:  the neighborhood, the community, employees, and the environment, if they choose to recognize these stakeholders.

So, why do we give these stakeholders far less accurate financial information today than we did 50 years ago?  It’s a question that has troubled me for the last decade or so as I have seen the quality of in-house financial information of small businesses decline substantially.  On-line banking is a partial contributor to this decline:  we think that by checking the bank accounts every day we “know” what is going on.  But the other main culprit is the dominance of QuickBooks in the accounting software market.

QuickBooks is marketed as the end-all/be-all accounting system that anyone with half a brain can set up and use, and that can do all the accounting work for you so that you don’t do much of anything.  This makes it possible for an untrained person to think that not only is QuickBooks a piece of cake to use; accounting itself is not something that requires any knowledge, skill, or advance study.  Heck, maybe you only even need a quarter of a brain to do it. 

As anyone who has taken accounting classes will tell you, nothing could be further from the truth.  And, as anyone who works with any kind of software will tell you:  learning any software package requires time, skill, knowledge, patience, study, and problem-solving abilities.  In our fast paced world, it’s easy to buy into the idea that “the software can do it” so we don’t have to. 

So, here’s what I recommend for those businesses with a “spousal bookkeeper”:  invest in college or university classes or other form of training for your spouse.  Talk with your CPA about problems with the current accounting system and ask them for their frank assessment of your personnel and recommendations for improvements.  Ask your bookkeeper for their frank assessment as well.  Most people don’t choose to be incompetent, but they sometimes need prompting to address a problem.  This way, maybe you can avoid divorce after all, and  have timely, accurate and reliable financial statements as well.

Getting in touch with your hidden debits and credits: how to use accounting software

Accounting software works exactly like the old leather-bound ledgers you used to see being hauled out, paged through, and carefully written in (using red and black ink) by green eye-shaded accounting clerks.  Unfortunately, many who now use accounting software have no accounting training or knowledge, but are not worried because “the software will take care of that”.  We’ll see.

Let’s take an example of what happens when an untrained person tries to make a “simple entry” such as recording a check to pay a bill.  First of all, it is a duplication of effort if a hand-prepared a check was written when your software can do it for you.  Probably, you failed to set up your vendor data base correctly, so you don’t have a vendor list from which to pull down the vendor name, address, and general ledger posting information.  And, you undoubtedly did not post the original vendor invoice correctly, so that this payment will not be properly credited to the invoice, and this will cause your accounts payable aging to go out of balance from the general ledger.

So, here is what should happen when a check is written to pay an invoice:

Step 1:  Set up the vendor in your vendor data base (name, address, etc.).  In this part of the software you can also specify:  1099 information and federal id number (if applicable), general ledger posting account, and other helpful information.

Step 2:  Record the vendor invoice.  Select the vendor from the drop down list.  Enter the date of the invoice (not today’s date!) so that the item is recorded in the period in which it was incurred.  Enter the amount, and double check to see that the general ledger account is the correct account for this expense.

Here is what has now happened in your software:

Accounts payable has been credited.  An expense account has been debited (or other account you specify).  In your vendor sub-ledger, an amount due to this vendor and the related date has been recorded.  This sub-ledger needs to agree to your accounts payable in the general ledger.  Here is how it looks using “T accounts” where the left side of the account is a debit, and the right side is a credit, and assuming we just paid the Verizon phone bill in the amount of $300.  Note that Accounts Payable (A/P) is a Balance Sheet account (a liability), and Telephone expense is an Income Statement account.

                  Accounts Payable                      Telephone expense

                  Dr          ¦        Cr                           Dr          ¦          Cr

                                     $300                         $300                  

                Verizon (A/P sub-ledger) 

                Dr              ¦    Cr                 

                                     $300     

When you make one entry – these three postings will occur.  Now, let’s pay the invoice.  We’ll select this bill to pay, probably from a drop down list in the Payables or Purchases module of whatever software you use.  We’ll check that the appropriate bank account appears as the bank from which we are writing a check.  We’ll make sure that the check number is correct, that it is the next one in the sequence and available to be printed.  Then we’ll pay the invoice and print the check.  Here is what has happened in the accounting software:

                              Accounts Payable           Cash in Checking

                               Dr          ¦        Cr                  Dr          ¦        Cr      

                              $300                                                         $300

     Verizon (A/P sub-ledger)  

         Dr          ¦        Cr           

        $300     

Now, the end result of all of these two entries:  Cash is less by $300,  telephone expense is more by $300.  Accounts Payable are zero, because we paid the bill.  The Verizon sub-ledger is zero, but reflects the complete history of the invoice and the payment for later reference.