Accounting is all about rules. If you want the numbers to paint an accurate picture, you need to do things right. And while there are plenty of hard and fast rules that are legally binding, there are also some accounting best practices that serve to make your job easier, save you time, and help you avoid mistakes.
Follow these accounting best practices to keep your numbers in check and everything in balance.
Craft a solid chart of accounts
The term chart of accounts refers to all the separate accounts within a bookkeeping or accounting system. Accounts record any transaction that impacts the company’s finances. Nearly all businesses use a double-entry accounting system that is being monitored by the Accountant Toronto, which uses at least two accounts for any given transaction. For example, a cash purchase of inventory would increase the Inventory account and decrease the Cash account.
The easiest way to think of it is to view each separate account as a file folder and the chart of accounts as the entire file cabinet. It holds all the accounts in order, in an organized fashion. While there are some standard procedures for the chart of accounts (COA), it’s also flexible and adjustable to fit each unique business.
The best chart of accounts for your company contains all the accounts you need and none that you don’t. This saves time and mental energy on accounting tasks. It also has a logical order that makes it easy to find what you’re looking for in the general ledger and make sense of the flow of each transaction. Most accounting software gives you general templates with commonly used accounts for different industries. But every business is unique and your COA should reflect that.
Stay on top of your transactions
It can be very tempting to bunch up all the bookkeeping for the end of the week or even the end of the month. Sort of a reverse “save the best for last” strategy. But this can easily come back to bite you.
Mistakes can be made, and if the actual transaction took place three or four weeks ago, it’s difficult to track down what really happened and correct it. Procrastination can be an accountant’s worst enemy. If you’ve been listening to true crime podcasts like the rest of us, you know how quickly the trail can go cold if you wait too long.
Fortunately, the next best practice can help you speed up your bookkeeping and record transactions almost instantly. It’s a great way of freeing your time for more focused and strategic work.
Automate wherever you can
Another way to minimize human error and escape the tyranny of faulty memory is automation. Today’s technology can do a wide variety of accounting tasks almost instantly. AI and machine learning allow your software to learn about your business and your financial rhythms and make very accurate predictions when it comes to classifying transactions.
Connecting your accounting software with specialized apps, like invoicing and billing software, payroll, inventory management, or whatever fits the needs of your specific business, allows you to bring transactions over automatically so you don’t need to manually enter everything in the books. Huge time-saver meets not having to pull out your hair!
Reconcile accounts monthly
One surefire way to keep yourself accountable (no pun intended) is to reconcile as many accounts as possible each month. Reconciliation is the process of comparing opening and closing account balances against an outside source of truth, like a bank or mortgage statement.
Reconciling helps you catch simple mistakes, as well as items that occurred on one side but not the other. For example, if you wrote a check that was never cleared through the bank, your reconciliation will show the discrepancy. The same is true if checks were written and not recorded, which could indicate either a major error or possibly even fraud. Once you track down the offending transaction, you can adjust accordingly to be sure there are no errors in your financial statements.
If you have a reasonable number of accounts or sufficient accounting staff, you should reconcile each account every month. If this isn’t possible, focus on the most important account, those with the highest value, and those with the most risk of error like high volume accounts, and rotate the rest to be reconciled at least every few months.
Why it all matters
The most crucial best practice of all is to truly care about your accounting. Whether you’re an accounting or bookkeeping professional or simply someone tasked with keeping the books because no one else will, you need to see the big picture. Accounting isn’t just a necessary evil to keep you on the right side of the law (and the IRS), it’s a critical part of running a healthy business.
Your financial records are like an x-ray of what’s really going on inside your business. Good accounting is necessary to create accurate books that can guide better decisions and steer you toward sustainable profits. Follow the five best practices above and you’ll find it easier than ever to keep up with the accounting and get great results.
