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 isn’t the most exciting activity 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 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. I also talk about training as a bookkeeper and what skills you need, about setting up systems, staying on the right side of the law, and about understanding the bookkeeping life cycle from go to whoa.

Understanding the Bookkeeping Life Cycle

Bookkeeping has a certain anachronistic quality to it, especially if you look beyond the glitzy buttons in your accounting software and start getting familiar with some of the terminology. But like many things that stem from the past, 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 goats, the purchase of sheep or the exchange of shining gold coins.

Your gig as a bookkeeper is to ensure every itsy-bitsy transaction that takes place gets recorded, and you do this using a journal. This journal may be a traditional ledger book, smelling of ink, sweat and musty leather. More pragmatically, this journal can take the form of a spreadsheet, a data-entry window in an accounting software program, a bank feed downloaded direct from your bank, or data imported direct by your accounting software.

Whenever you log transactions, you’re making a journal entry. As you record each journal entry, you have the nail-biting decision of what account this entry goes to. If this transaction is an expense, for example, is it for money-lending fees, servant’s quarters or water-hauling?

At the end of each month, you total the columns in each journal (if you can’t find an abacus, a calculator will do). Using the principles of double-entry bookkeeping, you then transfer these totals to the general ledger (a great fat tome that summarises the entries from all the other journals). This transfer process is called posting, and happens automatically if you use accounting software.

Last but not least, you draw up 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. (Again, if you use accounting software, these reports are generated automatically.)

The next day dawns and you, the bookkeeper, are to be found at your desk once more, recording transactions in your faithful journals. And 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 what 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, you’ll find that 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, usually days before a tax return 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.

And disadvantages …

• You miss out on the benefits of doing your books, such as up-to-date financial reports or budgets.
• If any bank statements are missing, by the time you realise, you often can’t view the transactions on the internet (because some banks only go back 120 days with online transaction listings).
• 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.

Cloud accounting offers a great alternative to shoebox accounting. The neat thing about cloud accounting 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: I’m only talking about shoebox accounting here, for very simple businesses where you just record business receipts. Cloud accounting software won’t automate transactions such as raising customer invoices, processing employee payroll or paying suppliers — you still need to record these transactions yourself.)

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 customer invoices and, in the process, you complete the bookkeeping for the transaction.

I find that most bookkeepers arrive at a certain rhythm, a rhythm that’s determined by how often a business needs to pay bills, issue customer statements or generate reports. Read through the different activities below and see whether you can pick up any tips about how to organise your time.

Record sales transactions once and once only

Here’s my number one rule: Generating a sales invoice and recording this sale in your books should be one and the same activity. In particular, avoid the following pitfalls:

• Don’t record sales in a word processor: If you use accounting software to do your books, use your accounting software to record sales. Don’t be tempted to use a word-processing program to record sales, even if the colours and flexibility of word processing seem attractive. Spend the time customising the sales templates in your accounting software instead.
• If you’re a retailer, integrate your point-of-sale system and your accounting software: If you integrate your point-of-sale system with your accounting software, daily sales totals and stock movements carry across automatically from one system to another. In other words, as soon as you make a sale in the shop, the bookkeeping for this sale is taken care of. Ah, the wonders of modern life.
• Ditch handwritten docket books: If you write invoices by hand because you’re out in the field, consider switching to a cloud-based accounting solution. You can then use a smartphone or a tablet to create invoices on the run. For more about cloud accounting, see Chapter 5.

Pay supplier accounts in batches

Checking supplier bills, balancing supplier statements and paying accounts are some of the most time-consuming parts of a bookkeeper’s job.

I talk more about streamlining workflow for bill payments in Chapter 7, but my main tip for bookkeepers is to set a schedule for bill payments, and then stick to it. For example, if you have weekly accounts, set one day per week where you settle these bills. If you have monthly accounts, set aside one day per month (usually a day that falls between the 20th and the last day of the month).

Avoid paying bills in dribs and drabs, and invest time to negotiate payment terms with your suppliers, rather than cash on delivery.

Set up bank feeds to import transactions automatically

So long as your accounting software includes this functionality, you can set up bank feeds so that every time you log onto your accounting software, all your banking transactions are imported automatically. All you have to do is allocate account codes to these transactions or match these transactions against transactions that have already been entered.

Chapters 5, 7 and 10 talk more about working with bank feeds.

Use software to manage employee pays

If you have employees, chances are you already have accounting software that includes payroll features. If so, record wages straight into your accounting software, using the software to record start and finish times, and to calculate tax, superannuation and print payslips. This way, the very process of calculating and generating employees’ pay means that the bookkeeping for payroll is complete.

I occasionally come across businesses that still maintain a handwritten wages book, where employees sign for their pay each week, because the business owner operates under the false impression that employees have to sign for their pay. That’s not true! No legal obligation requires employees to sign for wages every week. If someone is going to dispute receiving a certain amount, they can do so whether or not they have signed.

Reconcile often, reconcile well

Reconciling bank accounts is one of the core tasks for any bookkeeper (and a process that I talk about in much more detail in Chapter 10). Put simply, a bank reconciliation is when you match everything that’s on your bank statement against everything in your books, double-checking that your work is correct.

Always reconcile the main business cheque account before chasing customers for money, generating activity statements or GST returns, or printing management reports. For small- to medium-sized businesses, this means you probably reconcile accounts once every week or fortnight; for micro businesses, once a month probably does just fine.

Staying on the Right Side of the Law

This is a book about bookkeeping, not about bureaucracy, but I’d be neglecting my duties if I didn’t point out that, as a bookkeeper, you want to stay wise to government rules and regulations.

Registering as a business

In Australia, every business has to have its own ABN (short for Australian Business Number). The only exception to this rule is if you’re doing something as a hobby. The easiest way to apply for an ABN is to go to www.abr.gov.au and follow the prompts to register.

In New Zealand, sole traders don’t need a new Inland Revenue Department (IRD) number, because the existing personal IRD number of the business owner is enough. Be sure to contact the IRD and tell them that the business is open for trading, however. (The easiest way to do this is to apply for the online service with Inland Revenue, called myIR — check the Inland Revenue website (www.ird.govt.nz) for more information.) This way, you’re covered in case of an accident (when you tell the IRD you’re self-employed, they notify ACC to provide accident insurance cover).

You (or the business that you’re working for) may also be required to register a business name. The requirement to register a name depends on whether you’re a sole trader, a partnership or a company, whether you’re trading in Australia or New Zealand, and whether you intend to trade using your own name or a particular business name. If you’re just setting up a business and need more info on registering a business name, check out my title Getting Started in Small Business For Dummies (Wiley Publishing Australia).

Getting to grips with GST

In Australia, registering for GST is optional if your turnover is less than $75,000 a year and, in New Zealand, registering is optional if your annual turnover is less than $60,000. If you think that your business, or the business that you’re working for, is going to exceed this annual turnover threshold and isn’t yet registered for GST, then I suggest you speak to the accountant quick smart.

Of course, complying with the law in terms of GST is much more involved than simply registering. You need to get down on scintillating topics such as what’s taxable, and what’s not; the key elements of a Tax Invoice; how often to submit GST reports and much more. I won’t go into the whole GST rave just now (this is the first chapter, after all) but for more about GST, skip ahead to Chapters 4 and 6.

Managing payroll

Whether you’re a business owner doing your own books or a bookkeeper doing the books for someone else, bear in mind that as soon as a business takes on an employee, the real fun begins. Government paperwork starts pouring through the door like owl-delivered invitations to Harry Potter.

As a bookkeeper or payroll officer, the scope of your job very much depends on the size of the business and how many employees there are. At its simplest, a bookkeeper’s role is sometimes to record a couple of pay transactions per week, maybe checking tax deductions or calculating monthly superannuation. But at its most complex, a payroll officer may be in charge of the payroll for a couple of hundred employees, and have to be familiar with minimum pay rates, convoluted leave calculations, termination pay and much more.

My main advice to you in this chapter is to be aware that as soon as a business takes on employees, it takes on a series of legal obligations at the same time (I explore these obligations in detail in Chapters 9 and 11). As a bookkeeper, your job is to wise up to these legal obligations and not underestimate what’s involved. The moment you feel out of your depth, let your employer know, so that you can either get some assistance or in-house training, or get some support for further study.

Developing an Attitude

Over the years, I’ve worked with and taught lots of bookkeepers: Young and old, qualified and unqualified. Some scarily cocky, others achingly unsure, a few startlingly beautiful and many more rather careworn.

So what separates a good bookkeeper from a bad bookkeeper? Being young and beautiful doesn’t help much, that’s for sure (at least not with bookkeeping). Qualifications help, but aren’t the whole story either. Nay, I reckon what separates the wheat from the chaff is attitude.

A good bookkeeper cares when something doesn’t balance; gets upset when stuff goes missing, and goes a tad apoplectic at the sight of a disorganised office. A bookkeeper cares that the financial statements make sense, and feels responsible when it comes to getting customers to pay on time. A good bookkeeper, in other words, is worth their weight in gold.

Convince yourself this stuff matters

If you’re already a bona fide, serious bookkeeper, you probably know that doing the books is a vital activity and that without the services you provide, the world would probably grind to a halt. Or, maybe you’re not a bookkeeper at all, but the owner of a small business skim-reading these pages as fast as possible. You want to get your books done with a minimum of fuss, and maximum speed. You hate messing around with receipts, despise filing and feel ill at the very thought of tax returns. That’s okay! In the end, the ‘work’ of bookkeeping actually works for you.

Think of bookkeeping as a means to an end. Whatever your dreams, whether they’re to own your home outright, put the family business back on its feet or sail around the world in a 30-foot yacht, nothing much is going to happen if you don’t keep good tabs on your finances. And guess what? You can’t keep tabs on your finances unless you do your books.

Quit counting sheep

Am I preaching to the converted with all this chat about the importance of bookkeeping? Maybe you’re someone who knows what it means to lie awake at night counting sheep, worrying that the sheep don’t balance.

To you, I have a slightly different message. In this book, I encourage you to cast away your magnifying glass and grab a telescope instead. Sure, you’ve mastered the fine detail, but now you’re ready to move ahead and start looking at financial statements. Is the business making a profit? How does this year compare to last year? Is the business growing at a steady rate?

Surprisingly, I find a lot of bookkeepers don’t give a second thought to financial reports. Even business owners sometimes get so preoccupied generating sales and paying bills that the only measure of profitability becomes how much is left in the bank account.

Don’t miss out on the fun. As a bookkeeper, spend the time to read through Profit & Loss reports and Balance Sheets. You can help the owner understand what’s going on in their business, and chances are when you read these reports, you can spot any mistakes you’ve made. As a business owner, these financial reports are the reward for all your hard bookkeeping efforts.

Want to know more? Feel welcome to skip ahead to Chapter 15, which gives the lowdown on both Balance Sheets and Profit & Loss reports.

Do your job well

Whether you’re a professional bookkeeper or a business owner, you almost certainly want to get this bookkeeping lark over with as swiftly as possible. The stumbling block is figuring out how not to overcomplicate things. I’m often taken aback at how much time people take to do their books, wasting hours checking and double-checking, shuffling paper from one place to another.

I’m not suggesting compromising quality in order to get a job done quickly, but I am suggesting you put efficient systems in place, right from the word ‘go’. As you read this book, I give you my hard-won advice on the best way to approach a task. As you read, ask yourself: ‘Am I doing this task in the most efficient way?’, ‘Can I streamline processes by taking advantage of new technology?’ and ‘How can I avoid entering things twice?’

Getting Skilled Up

I often get asked by business owners, ‘Do I need to do a bookkeeping course?’ For most small businesses, I reply that no, a course isn’t necessary. You may need help from your accountant, and some guidance from handy references like this one, but with a bit of patience, you should be able to master the basics. (I devote a lot of space to explaining everyday bookkeeping tasks in Chapters 7, 8, 9 and 10.)

On the other hand, if you’re a bookkeeper who works for more than one business, you need to be a whole lot more versatile. Your client or employer expects you to be the expert, and is unlikely to tolerate a long and slow learning curve. You’ll almost certainly want to devote some time to formal study.

The line between a professional bookkeeper and an accountant gets a little blurred at times. An experienced, well-trained bookkeeper often takes on some of the work that usually falls to the accountant to complete, in the same way as an accountant picks up loose ends if working with a bookkeeper who only does the bare essentials.

Keeping your qualifications up to date

Even if you’ve been a bookkeeper for years, you may find that you’re legally obliged to formalise your experience with an official qualification.

In Australia, you must have a certain minimum level of qualifications if you assist clients preparing and lodging Business Activity Statements (BAS), because these qualifications are essential in order to register as a BAS Agent. You will also need to take out professional indemnity insurance. I talk more about the requirements for BAS Agent registration in Chapter 18.

In New Zealand, bookkeepers don’t have to register to file GST or any other returns. However, if you have other bookkeepers working for you, professional indemnity insurance is a really good idea.

Joining an association

If you’re serious about bookkeeping as your profession, I recommend you join a professional bookkeeping association or network, such as the Institute of Certified Bookkeepers (ICB) or the Australian Bookkeepers Network (ABN). In New Zealand, the main industry association is the NZ Bookkeepers Association (visit www.nzbookkeepers.co.nz).

Membership for these associations or networks is a relatively modest cost each year, but probably provides the only practical way for you to stay abreast of relevant changes in accounting software, bookkeeping professional requirements, tax legislation and much more. Not only that, but membership also provides you with a community of other bookkeepers so that you can get together at conferences or local networking meetings.

Signing up to a course

In Australia, the minimum qualification for a bookkeeper is generally a Certificate IV in Accounting or a Certificate IV in Bookkeeping. As I mention a tad earlier in this chapter, in order to assist clients in preparing or lodging Business Activity Statements, you must first register as a BAS Agent, and this level of qualification is a base requirement. (I talk more about the BAS Agent registration process in Chapter 18.)

Other possible bookkeeping qualifications include a Diploma of Accounting or an Advanced Diploma of Accounting.

The New Zealand Diploma in Business (NZDB) is a nationally recognised qualification that includes several units particularly relevant for bookkeepers, including Accounting Practice, Accounting Principles and Business Computing. Learning Post (www.learningpost.ac.nz) offers a Certificate in Practical Accounting (Level 4) ideal for remote learners doing part-time study, and most NZ polytechnics have certificates in office administration.

If you’re not sure whether you’re ready to commit to formal bookkeeping qualifications, you could try one of the more general bookkeeping courses offered by community colleges or private training organisations. In Australia, bear in mind that if you do a course that isn’t run by a nationally recognised Registered Training Organisation, you may not receive credits if you decide to go on to more formal study and you almost certainly will not gain sufficient qualifications to register as a BAS Agent. Similarly, in New Zealand, check that your education provider is accredited to provide assessments under the National Qualifications Framework (NQF).

The other training that could work for you is to do a one-day or two-day course specific to whatever accounting software you’re using, such as an MYOB, QuickBooks Online, Reckon or Xero course. These courses are good at getting you started with doing the books for your business, but you won’t get the same kind of theoretical understanding about how bookkeeping works as you would with a more specific bookkeeping course. You also won’t receive any kind of formal qualification.

If you are (or are interested in becoming) a contract bookkeeper, I talk more about this in Chapters 17 and 18.