3 approaches to small business accounting

by Tony Novak, CPA, MBA, MT
originally published: 8/16/2014

A small business owner recently approached me and asked how much it would cost to turn his pile of bank records and create a QuickBooks¹ accounting records. His business was still very simple with relatively few transactions. He had already purchased the desktop version of QuickBooks but had never used it. As we talked, it became clear that most of his management accounting needs were met by another software program specific to his industry and so all he really needed was a tax return. (He was focused on the federal income tax return but we had to consider wage taxes, state and local filings as well).

In this case it became clear that creating a QuickBooks accounting system might not be the best approach and that a simpler, quicker system might best serve the need. The actual recommendation will be a matter of whether he wants to do it himself or hire an accountant.

This article simply presents three fundamentally different approaches to small business accounting with the advantages and disadvantages of each

1) Spreadsheet - It is possible for a small business to handle all its recordkeeping on a single spreadsheet. This takes little computer or accounting skills. I have a template available free of charge to clients who want to take this approach. The work involves entering the date, briefly describing each transaction and placing the amount it in the appropriate column. An accountant is usually not needed. This is best-suited to the smallest businesses, perhaps start-up or part-time ventures run by one person. The main advantages besides simplicity and no cost, is that the spreadsheet summarizes the physical records (often paper receipts) and automatically handles the arithmetic. The disadvantage is that this becomes cumbersome for a business that has more than about 20 transactions per month.

2) Accountant Write Up - The small business owner simply hands over whatever records are available to the accountant, who plugs it into his office software and comes out with neat reports for management banks and taxing authorities. This is the traditional "shoebox" approach to accounting. Advantages include minimal time by the business owner and no knowledge of accounting is required. This is most appropriate when the business runs another management software² that integrates the internal accounting, for example, customer charges and payments. The disadvantages of this approach are higher cost and the highest risk of significant errors in the reports.

3) Accounting software - Most small businesses, prior to 2012, purchased desktop accounting software. Very soon most small businesses will switch to similar but more efficient and less expensive versions of the same programs offered through cloud-based systems. The discussion below presumes that the switch has already been made to the cloud.

 Intuit QuickBooks is by far the most popular in this category but there are plenty of other capable systems offered. Advantages are that the accountant and business owner can each work on the company's books simultaneously, without the need to share files. There is a higher level of security, no risk of dada loss, no need to update software, no work to reinstall with new hardware, and the ability to work across platforms including workplace terminals, home PCs, tablets and even smartphones. Overall cost of accounting is reduced because the accountant typically works remotely and this software automatically ties in to tax return preparation programs. The cost of the software is recouped in lower accountant's fees so the net cost is typically lower for established businesses.  Once transaction data is correctly entered, management and tax reports are immediately available. This system is most effective at catching errors or detecting fraud. The greatest advantage, however is that real time operating data combined with visually effective reporting can make a significant contribution to business management and when used effectively, this is likely to lead to improved profitability.

Footnotes:

¹ The author is a certified QuickBooks ProAdvisor.

² The author has a business relationship with Vend software, a market leader in cloud-based retail accounting and management software.

 

Related topics:

How to fix the small business accounting fiasco

Not your father's bean counter

 

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