Behind the Scenes of a Bookkeeping System
Bookkeeping refers to the process of accumulating, organizing, storing, protecting, and accessing the financial information base of an entity, which is needed for two broad purposes. The first is facilitating the day-to-day operations of the entity, and the second is preparing financial statements, tax returns, and internal reports to managers.
Bookkeeping (also called recordkeeping) can be thought of as the financial information infrastructure of an entity. Of course the financial information base should be complete, accurate, and timely.
Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls. When an error creeps into the system it can be difficult to root out and correct. Data entry controls are particularly important. The security of online and computer-based accounting systems has become a top priority of both for-profit businesses and not-for-profit entities.
Accountants design the internal controls for the bookkeeping system, which serve to minimize errors in recording the large number of activities that an entity engages in over a specific time period. The internal controls are also relied on to detect and deter theft, embezzlement, fraud, and dishonest behavior of all kinds. In accounting, internal controls are the ounce of prevention that is worth a pound of cure.
Most people don’t realize the importance of the accounting department in keeping a business operating without hitches and delays. Typically, the accounting department is responsible for the following:
Payroll: The total wages and salaries earned by every employee every pay period, which are called gross wages or gross earnings, have to be calculated. Based on detailed private information in personnel files and earnings-to-date information, the correct amounts of income tax, social security tax, and several other deductions from gross wages have to be determined.
Stubs, which report various information to employees each pay period, have to be attached to payroll checks, or prepared separately if net pay is sent electronically to the employee’s bank account. The total amounts of withheld income tax and social security taxes, plus the employment taxes imposed on the employer, have to be paid to federal and state government agencies on time.
Retirement, vacation, sick pay, and other benefits earned by the employees have to be updated every pay period. In short, payroll is a complex and critical function that the accounting department performs. Note: Many businesses outsource payroll functions to companies that specialize in this area.
Cash collections: All cash received from sales and from all other sources has to be carefully identified and recorded, not only in the cash account but also in the appropriate account for the source of the cash received.
The accounting department makes sure that the cash is deposited in the appropriate checking accounts of the business and that an adequate amount of coin and currency is kept on hand for making change for customers. Accountants balance the checkbook of the business and control which persons have access to incoming cash receipts.
Cash payments (disbursements): In addition to payroll checks, a business writes many other checks during the course of a year — to pay for a wide variety of purchases, to pay property taxes, to pay on loans, and to distribute some of its profit to the owners of the business, for example.
The accounting department prepares all these checks for the signatures of the business officers who are authorized to sign checks. The accounting department keeps all the supporting business documents and files to know when the checks should be paid, makes sure that the amount to be paid is correct, and forwards the checks for signature.
Procurement and inventory: Accounting departments usually are responsible for keeping track of all purchase orders that have been placed for inventory (products to be sold by the business) and all other assets and services that the business buys — from postage stamps to forklifts.
A typical business makes many purchases during the course of a year, many of them on credit, which means that the items bought are received today but paid for later. So this area of responsibility includes keeping files on all liabilities that arise from purchases on credit so that cash payments can be processed on time.
The accounting department also keeps detailed records on all products held for sale by the business and, when the products are sold, records the cost of the goods sold.
Costing: Costs are not as obvious as they look. Many decisions have to be made regarding what factors to include in the manufacturing cost of a product, and in the purchase costs of products sold by retailers such as Costco and Wal-Mart. Tracking costs is a major function of accounting in all businesses.
Property accounting: A typical business owns many different substantial long-term assets that go under the generic names property, plant, and equipment — including office furniture and equipment, retail display cabinets, computers, machinery and tools, vehicles, buildings, and land.
Except for relatively small-cost items, such as screwdrivers and pencil sharpeners, a business maintains detailed records of its property, both for controlling the use of the assets and for determining personal property and real estate taxes. The accounting department keeps these property records.