Developing an accounting system

Customising your
bookkeeping/accounting system
The involvement that managers have with the keeping of records and the
production of accounting reports varies widely from business to business.
Some managers choose to keep only basic cash records using their cheque
book (stubs) or a cash book. Credit transactions may not be recorded at all,
other than via source documents. The source documents may be collected
together (often in a shoe-box) and then presented to the accountant for
processing at the end of each financial year. The financial reports which are
generated may not be well understood by the manager, looked at once or
twice and then filed away, never to be seen again. This type of manager is
clearly taking a hands-off approach to the financial management of the
business.
At the other end of the scale, a manager may have a policy of doing all of
the bookkeeping work and preparing monthly financial reports, to leave
only a small amount of work (e.g. checking and adjusting) for the
accountant at the end of the financial year. When the end of year reports are
received from the accountant, this manager spends time analysing and
interpreting the reports, calculating ratios, percentages and variances from
the budget. He then discusses the results with his accountant, seeking
advice on how to improve performance in the next period. At the same time
he asks for feedback on how to improve the bookkeeping or reporting
system. Finally, she uses the information contained in the reports as a basis
for the preparation of budgets for the next period. This type of owner is
clearly taking a pro-active role in the financial management of the business.
If you set up your own bookkeeping/accounting system you should make
sure the system is appropriate for your needs. Firstly, decide on the type and
detail of information you require. You may decide to simply fulfil the
record-keeping and reporting requirements of the tax office. However, as
discussed earlier in this topic, you should aim to use your accounting system
should provide whatever information is necessary to help you make
decisions, plan and control business activities effectively. Once you have
determined your information requirements you can work on designing the
system to meet these needs. This should be done in consultation with your
accountant, since he or she will have experience in setting up
bookkeeping/accounting systems.
Journals should be seen as tools used for analysing transactions according to
your needs. When setting up your cash payments journal, you should use

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 columns to group expenses which occur frequently. This allows you to post
one total to each relevant ledger account rather than a separate posting for
each transaction. You can purchase pre-ruled books for this purpose into
which you add appropriate column headings. For example "Collins"
produce bound books for journals (with up to 14 columns for common
expenses). One write systems are also available (e.g. Kalamazoo) which
allow you to update journals as you fill out pre-carbonated source
documents.
Your ledger system is based on a chart of accounts which you can add to as
you please. The number of accounts you maintain is up to you. For
example you may have only one sales account in which to record all
income, or you may decide to have separate accounts for contract income
and other income. Further you may decide to separate other income into
two accounts; e.g. odd job income, and commission income. The degree
to which accounts are specific will depend on the size of each account and
its importance to the performance and/or position of the business.
The use of subsidiary ledgers may be necessary to make bookkeeping easier
provide extra information and allow checks. Contractors will ideally have a
job cost ledger to enable the timely preparation of job cost cards. If you
have a large number of creditors but only two or three debtors, you may
decide to keep the individual creditors accounts in a subsidiary ledger (and
use a control account in the general ledger), but leave the individual debtors
account in the general ledger.
With any accounting system there will always be a trade-off between the
extent of information produced and the costs (including time) of producing
the information. The timeliness of information produced is especially
important since good information is useless if it arrives too late to be acted
upon. Therefore you should have a system that can produce information
with relative ease at short notice.
When setting up an accounting system, you should consult your accountant
who can give advice on how to tailor the system to meet your needs.

Choosing an accountant
Every business should employ the services of a professional accountant at
least once a year, at the end of each financial year (June 30). At this time
the accountant should:
check over your bookwork and/or accounting reports
deal with any difficult or unusual transactions not already processed
deal with any end of year adjustments to be made
help to prepare your tax return
suggest potential tax savings
You should select your accountant very carefully. Rather than choosing one
from the yellow pages at random, you should talk to the owners of similar

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 businesses and seek recommendations from them. To get value for money,
the accountant you choose should have other clients in your industry (the
more the better), since they will be more likely to have tailored the needs of
those in your industry. Ideally your accountant will have been highly
recommended and have recent tax accounting experience with other
businesses similar in size and nature to yours. Your initial meeting with the
accountant will usually be free of charge and this will give you a chance to
assess the accountants suitability for your needs.
If you have a small business, you may not get the type of service you require
from a large accounting firm which deals mainly with large clients. In this
case a smaller suburban practice may be more appropriate, since they will
have more small business clients and therefore be more aware of small
business issues and problems.
Many businesses use the services of a bookkeeper at regular intervals to
process source documents and produce interim reports. Be aware that a
bookkeeping service will usually charge a much lower hourly rate than an
accountant, so any bookkeeping work that is out-sourced should be
performed by a bookkeeper rather than an accountant. Many small
businesses have their records updated and reports generated by a
bookkeeper for as little as $40 each month. If you use a bookkeeper or
assume this task yourself, you should be able to keep accountancy fees
down to only a few hundred dollars at the end of the financial year.
The accountant will usually charge an hourly fee which may vary between
accountants. The time spent by the accountant will depend on how much
work is left for them to perform and will include the time spent providing
advice. You should do as much of the preliminary work as possible before
presenting it to a bookkeeper or accountant. The more you do yourself, the
less accounting costs you will incur. Just as importantly, the more familiar
you are with your own accounting system, the more you will know about
your business and how your performance and position are affected by your
business activities.
You should make sure that you can relate to your accountant as this will
provide the basis for a good working relationship. If you find it difficult to
talk to your accountant, you may be reluctant to ask questions or seek
advice. Your accountant should be able to provide feedback and/or advice
about any financial aspects of your business or personal affairs and it is
important that you make full use of your accountants experience and
expertise.
Good advice is usually worth more than it costs, however many business
owners are reluctant to spend more than is necessary with their accountant.
A one hour session with your accountant following your examination of the
end of year reports and tax assessment may provide you with invaluable
feedback on areas of concern to you or your accountant.
Accountants are often called upon to provide advice or feedback on:
tax planning
cash flow planning

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 budget preparation and variance analysis
advice on the implementation of a computerised accounting system
cost reduction strategies
control of debtors
inventory control
advice on investing spare funds
preparation of loan applications

Computerised accounting systems

Computers have revolutionised many areas of business management,
including record keeping and accounting. Many businesses now use
computerised accounting systems rather than the traditional manual system.
Recall that any accounting system is an information system, since it is used
to process data (about transactions) and produce information (about
performance and position). Computers are valuable tools in this area since
they are ideally suited to processing large amounts of data accurately and
efficiently. The main advantages of computerised accounting information
systems are:
ability to easily handle large volumes of transactions data
automatic production of up-to-date accounting reports at any time
ability to generate standard and customised reports
speed of reporting/feedback
easy storage of data
security features
early warning features
ability to produce audit trails to assist accountants and tax auditors
ability to link to other computer applications, such as costing and
budgeting systems.
When considering the selection of a computerised accounting system, you
should use the following steps as a guide to choosing suppliers of
equipment, hardware and software:
Step 1 Define your record keeping and information needs;
e.g. volume of transactions
reporting frequency
standard or customised reports.
Step 2 Choose software appropriate to meet your information needs.
Seek independent advice, talk to other software users.

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 Step 3 Choose hardware appropriate to support the software.
Usually a standard personal computer will be sufficient.
If you already have computer hardware, an update or
expansion may be necessary.
Step 4 Choose suppliers of the software and hardware
Consider the level of service and support provided by
potential suppliers.
Choose a well-established and reputable supplier.
Once you have selected a system, consider the costs of setting up the system
compared to the benefits it will produce, and decide whether or not to go
ahead.
There are generally three different types of software used to keep accounts:
Pre-existing software; which you install into your computer ready to
use.
Software custom-written by end users; for example, a spreadsheet
package could be used to develop a record keeping system and
report generator. This can provide a cost effective solution and
would allow you to progressively customise the system.
Software custom-written by professional programmers; usually
required only by larger organisations, with specialised reporting
Most users purchase pre-existing software, since this is usually the simplest
and quickest option. Many different existing software packages are
available including:
Sybiz/Probiz Newviews
Attache Solution 6
M.Y.O.B. (Mind your own business)

These packages often involve standalone components that can be linked,

such as a cash book, general ledger, accounts receivable, accounts payable,
invoicing, stock control and payroll. This allows you to begin with a basic
system and add various components as they are needed. When you switch
from a manual accounting system to a computerised system, you should run
the two systems simultaneously to start with. This allows you to make
accuracy checks, and provides a backup system should the new system fail
or require debugging.

Spreadsheets and budgeting

A spreadsheet is an easy to use computer software package that allows you
to view text and data in a familiar way; as a table (made up of cells). The
data contained in a spreadsheet can be easily manipulated with the use of
mathematical formulas, to automatically perform complex but reliable
calculations. This provides a powerful tool for the generation of
management reports. Spreadsheets provide features such as automatic

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 recalculation and what if capabilities. As with all computer files,
spreadsheet files can be efficiently stored, retrieved and updated.
Spreadsheets are particularly useful for the preparation of budgets, since
most figures found in a budget have been calculated using other figures in
that budget (e.g. direct expenses are usually calculated as a percentage of
budgeted sales). Automatic recalculation allows you to quickly see the
effect of any changes in the budget. For example by changing the budgeted
sales figure, you can instantly see the effect on the rest of the budget. You
could easily determine the level of sales required to break even for a period
or to produce any targeted level of profit.
Numerous spreadsheet packages are available; the following are common
examples:
Excel Lotus 123
As easy as Visicalc
Multiplan
Cheap independent advice about computerised accounting systems and
spreadsheet packages is available from the Computer Advisory Bureau of
the Small Business Centre.

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