Chapter 1

Introducing the Bookkeeping Game

IN THIS CHAPTER

Working through the bookkeeping life cycle — from chrysalis to butterfly

Matching bookkeeping systems to the game in hand

Keeping the law on your side

Settling into a certain mindset

Deciding whether you need to get more training

In some ways, bookkeeping is like cooking up a fine meal. The process of washing and chopping and steaming and frying isn’t much to write home about. What makes everything worthwhile is the outcome: The hot taste in your mouth, the warm feeling in your belly. A good bottle of red simply adds to the fun.

In the same way, adding up receipts and paying bills aren’t the most exciting activities in the world. What brings the buzz to bookkeeping are the results: An organised office, cash in the bank and a set of financial reports that help a business succeed. After all, without a Profit & Loss report, how does a business know how it’s doing? And without a Balance Sheet, how can a business owner gauge their personal worth?

In this chapter, I outline the bookkeeping life cycle from go to whoa, and talk about setting up systems and staying on the right side of the law. I also explore the qualities of a good bookkeeper: Not just someone who can record transactions accurately, but also someone who cares about the financial statements that they generate. And I cover training as a bookkeeper and what skills you need.

Understanding the Bookkeeping Life Cycle

Bookkeeping can have a certain anachronistic quality to it, especially once you start getting familiar with some of the terminology. But like many things that stem from the past and continue to be relevant today, bookkeeping is a deeply logical process that flows beautifully from one stage to the next.

The essence of bookkeeping — and the beginning of any bookkeeping entry — is a transaction. You already know instinctively what a transaction is: The sale of goods, the purchase of services or the shifting of money between accounts.

Your gig as a bookkeeper is to ensure every itsy-bitsy transaction that takes place gets recorded, and you do this using a journal. In the old days, this journal was a large book, smelling of ink, sweat and musty leather. Nowadays, this journal can take the form of a spreadsheet, an entry in your accounting software, or a bank feed downloaded directly from your bank. (Nowadays, these entries are often part of the business activity itself. For example, if configured correctly, an online sale should generate an invoice automatically, as well as the necessary bookkeeping entries.)

Whenever you record transactions, you’re making a journal entry, and as you record each journal entry, you need to decide what account this entry goes to. If this transaction is an expense, for example, is it for advertising, rent or staff wages?

Previously, bookkeepers would total the columns in each journal at the end of each month, and transfer these totals to the general ledger (a great fat tome that summarised the entries from all the other journals). This transfer process was called posting, and these days happens automatically if you use accounting software.

The last step of the traditional bookkeeping cycle is to generate a report using the final balances from the general ledger, creating a document called a trial balance. The amounts in the trial balance form the basis for key pillars of wisdom such as the Profit & Loss report, which summarises income, expense and net profit, and the Balance Sheet report, which summarises the value of assets, liabilities and equity. (Happily, if you use accounting software, these reports are generated automatically.)

So there you have it: The life cycle of bookkeeping in a nutshell, with a distinctly historical twist, starting with a simple transaction and culminating in a set of financial statements that let everyone know what’s what.

Figuring How Often to Do the Deed

So how often do you need to do this whole bookkeeping game? On the one hand, you don’t want to get so behind that you can’t produce reports or see how much customers owe you but, on the other hand, you don’t want to overdo things, working on your books so often that you record only one or two transactions each time.

While you’re of course free to chart your own course, here’s a look at the pluses and pitfalls of the two most common methods: Doing your books once every few months (see the next section, ‘Working with a shoebox’) and doing your books on a regular basis (see the section ‘Doing the books as you go’, later in the chapter). By the way, if you’re weighing up these methods, Chapter 4 also provides a lot of info about the regular deadlines that form part of a bookkeeper’s schedule.

Working with a shoebox

Shoebox accounting brings a comfortable chaos to any business. As the financial year ticks by, the owner of the business dumps all bank statements, receipts and supplier bills in a messy heap somewhere. Once a year or every few months, usually days before a tax return or Business Activity Statement is due, either the business owner or an unfortunate bookkeeper retrieves this unhappy heap and attempts to put it in some kind of order.

I’ve been the unfortunate bookkeeper in this situation many a time. Admittedly, I’ve had to deal with very few shoeboxes but, instead, piles of dog-eared receipts in scrappy manila folders, old fruit boxes, tattered briefcases and, one time, a complete timber drawer straight out of the client’s desk.

Shoebox accounting has its advantages:

• You can ignore the drudgery of year-round bookkeeping, a tactic that suits the ostriches of this world.
• Bookkeeping is sometimes a relatively swift process, because you churn through a whole year’s transactions in one hit. If you use accounting software and have bank feeds connected, coding transactions from the bank feeds for a few months or even a year at a time can actually be quite efficient.

And disadvantages …

• You miss out on the benefits of doing your books, such as up-to-date financial reports or budgets.
• By the time you do the books, you’ve forgotten what some of the transactions are, so you waste hours trying to do things like match up receipts against miscellaneous electronic debits from your bank account.

In short, I recommend shoebox accounting only for the smallest of small businesses, such as a hobby business, or a business with no GST, no wages, few bills and irregular income.

Accounting software combined with bank feeds greatly improves the old-fashioned style of shoebox accounting. The neat thing about bank feeds is that even if a business owner doesn’t log on to their software for six months or more, when they do finally log on, most transactions are there automatically. Also, the ease of cloud accounting often converts even the most reluctant of shoebox bookkeepers into bookkeeping enthusiasts. (Note: Of course, although the combination of bank feeds and bank rules makes recording business expenses super quick, other transactions such as customer invoices and employee pays are harder to automate.)

Doing the books as you go

Most businesses do most of the day-to-day bookkeeping as transactions occur. If you use accounting software, every time you make a sale to a customer, you record the sale in your books. Voilà, the bookkeeping for this transaction is complete. Similarly, when you receive a payment, you record the transaction against outstanding...