Why Fiddle-Faddle Accounting Might or Might Not Be Right for Your Business - dummies

# Why Fiddle-Faddle Accounting Might or Might Not Be Right for Your Business

Most small businesses — or at least those small businesses where the owners aren’t already trained in accounting — have used the fiddle-faddle method. The financial statements that follow show an imaginary hot dog stand business. The first one shows the income statement for the one day a year that the imaginary hot dog stand business operates, and the second shows the balance sheet at the start of the first day of operation.

 Sales revenue \$13,000 Less: Cost of goods sold 3,000 Gross margin \$10,000 Operating expenses Rent \$1,000 Wages 4,000 Supplies 1,000 Total operating expenses 6,000 Operating profit \$4,000
 Assets Cash \$1,000 Inventory 3,000 Total assets \$4,000 Liabilities Accounts payable \$2,000 Loan payable 1,000 Owner‘s equity S. Nelson, capital 1,000 Total liabilities and owner’s equity \$4,000

With the fiddle-faddle method of accounting, you individually calculate each number shown in the financial statement. For example, the sales revenue figure shown in the first table equals \$13,000. The fiddle-faddle method of accounting requires you to somehow come up with this sales revenue number manually. You may be able to come up with this number by remembering each of the sales that you made over the day. Or, if you prepare invoices or sales receipts, you may be able to come up with this number by adding all the individual sales. If you have a cash register, you may also be able to come up with this number by looking at the cash register tape.

Other revenue and expense numbers and the balance sheet numbers get calculated in the same crude manner. For example, the \$1,000 of rent expense gets calculated by either remembering what amount you paid for rent, or by looking in your checkbook register and finding the check that you wrote for rent.

Some of the values shown in an income statement or on a balance sheet get plugged, meaning that they’re calculated using other numbers from the financial statement. For example, you don’t look up the profit amount in any particular place; instead, you calculate profit by subtracting expenses from revenue. You can also, of course, calculate balance sheet values, such as total assets, owner’s equity, and total liability of owner’s equity.

The fiddle-faddle method of accounting works reasonably well for a very small business as long as you have a good checkbook. So, for a very small business, you may be able to get away with this crude, piecemeal approach to accounting.

But unfortunately, the fiddle-faddle method suffers from three horrible weaknesses for a firm that doesn’t have super-simple finances:

• It’s not systematic enough to be automated. A systematic approach like double-entry bookkeeping can be automated, as QuickBooks does. Because the fiddle-faddle approach can’t be automated, every time you want to produce financial statements, you or some poor co-worker goes to an enormous amount of work to collect the numbers and all the raw data.

• It’s very easy to lose details. If you know the operating expense categories that the business incurs, it’s fairly easy to look through the check register and find the check or checks that pay rent, for example. However, what if you also have an advertising expense category or a business license expense, or some other easy-to-forget category? If you forget a category, you miss expenses.

• It doesn’t allow rigorous error checking. Error checking is important with accounting and bookkeeping systems. With all the numbers and transactions floating around, errors easily creep into the system.