Setting up Your Accounting Software

So you're considering using a computerized accounting program. Before you can start printing checks, tracking bills, and printing invoices, you will first want to create a company file which should have a list of vendor, customers and accounts receivable balances. Additionally you will need a list of products and services sold, and all the necessary financial account balances. Are your eyes crossing yet? At this point most people will enlist the services of a professional to make sure that the accounting system is done right. Although it may take some time, energy, and effort to set up your accounting system you will find it to be an invaluable tool. Some of the benefits that you will enjoy from your new accounting software are: improved data accuracy, compliance, productivity, and revenues.

I often suggest to new clients that they use QuickBooks for their entrance into the world of accounting, but the principles are the same for most accounting software package. Before you get started with your new accounting system, you will need to gather some information about your company. This article explains the basic information you need and how to best assemble it.

The six step process:

1. Collect your company’s important information

2. Decide on a start date.

3. Gather your business records.

4. Set up your financial accounts.

5. Input transactions.

6. Verify balances on your accounts.

1. Company Information

Most accounting programs have an interview that walks you through the basic steps of setting up your accounting system. Some information that would be helpful to have for this part of your company set up includes: the name of the company, the tax ID (EIN), state sales tax ID, state employee income tax withholding ID, unemployment insurance number, the street address, phone, fax, email, and website information.

If you haven’t already received your tax ID go to http://www.irs.gov/businesses/small/article/0%2C%2Cid%3D102767%2C00.html follow the instructions on the site and at the end you will be issued a Federal Employer Identification Number. Keep in mind that if you are a sole proprietor you will use your social security number for your tax ID. The EIN will normally be issued for partnerships, limited partnerships, limited liability companies, and corporations.

In many states you will be able to register with your state online for sales tax ID numbers, employee income tax withholding ID numbers, and unemployment insurance number. In some cases where you will not be selling products within your state lines the sales tax ID will not be required. If you will not be hiring employees you will not need to secure a state employee income tax withholding ID or an unemployment insurance number.

2. Decide on a start date

The start date is a date that you choose in order to begin entering transactions. The start date should be a date where you can easily obtain or calculate your account balances. These balances should be entered in your accounting program as of the starting date or beginning point. Keep in mind that you do not enter any transactions prior to your chosen start date. Entering information prior to your start date will throw off your account balances so as to not allow you to reconcile correctly. Once your starting balances have been entered, you will then need to enter all transactions between that start date and your current date. Once you have entered the start date and all subsequent transactions the accumulated totals should equal the current balance for each of your accounts. The accounts that typically will carry balances are the: accounts receivable from your customers, accounts payable owed to vendors, bank accounts, credit card liabilities, income accounts, and expense accounts.

Entering beginning balances as of the start date

When calculating beginning balances of accounts, you should:

Calculate balances as of a chosen date also known as your start date.

Ignore payments received from customers after the close of business on that date.

Include amounts due to vendors as of the close of business on that date.

This means that all transactions outstanding checks, payments received, invoices outstanding, etc. prior to and including the close-of-business on your start date are reflected in the balances entered for your start date.

To calculate the balance of an account as of the start date, you should start with bank statements, vendor statements, and/or credit card company statements. These statements will provide you with a simple starting point, from there you still need to add transactions that occurred prior to the start date but that are not reflected on the statement, also subtract any payments made which have not posted as of the start date. For accounts receivable, summarize all charges and payments for each customer, prior to and including the start date in order to determine the balance outstanding as of the start date.

Beginning balances should be calculated for all account in the chart of accounts: bank accounts, accounts receivable, inventory, fixed assets, accounts payable, credit card liabilities, notes payable, and equity accounts. When the start date falls on a new fiscal year, income and expense accounts will be zero, but if the start date is in the middle of a fiscal year, income and expense account balances should be calculated as well.

3. Gather your business records

Calculating and entering the bank balances, accounts receivable, and accounts payable constitute the majority of the work for most businesses. Setting up these accounts depends upon your situation. Does your business already exist or are you starting something new? Have you been keeping up accounting records or have things gotten a behind?

Setting up a new business

Setting up an accounting system for a new business is much simpler than for an existing business. New businesses have zero balances for all financial accounts, as the company enters transactions the company then can accurately track account balances. For a new business, the start date is the date of the first transaction, which is usually when the company opens a new bank account and performs its first deposit. Transactions such as deposits or checks created are recorded as they happen. Accounts may be created as the need for them is recognized.

Converting from an existing system

If you have an existing business, and are converting from a manual system, your existing accounting system is a good source for beginning balances. With an existing business, you need to decide what start date to use, enter the beginning balances as of that date and then record transactions from that date to present.

Your choice of date should be influenced by how either simplicity or analytic need. To be simple your business should consider a date that falls at the end of an accounting period, for instance a month-end, in some cases your business will have a specific need that requires you to select a start date that may be several months or possibly a year or more in the past. This need may be because of some analysis that you must have in order to properly understand your financial situation. Once you have determined your start date then you should begin entering transactions from your old system into your new system as of the start date and proceeding forward until you have reach today’s date. By choosing a recent date, you may reduce the number of transactions to be entered between start and current dates. From the start date forward, all transactions must be entered in your new system. In most accounting programs, no transaction details or financial reports will be available prior to the start date; however this information may be found in your previous accounting records or program.

Generating beginning balances from last year's tax records

If your current system is non-existent or not fully organized you may be able to use your previous year's tax records as a source for locating your beginning balances, if your accountant prepared what is known as a "trial balance." In order for your accountant to prepare the trial balance he or she will have had to examine the accounts in order to insure that the trial balance is accurate. The trial balance will also have been adjusted for items such as depreciation and amortization.

The use of these balances can be helpful as a start for determining your beginning balances, but it can also require much more work if you are late in the year since the previous year’s tax records will be accurate as of the last day of your fiscal year. Most small businesses use a calendar year as the fiscal year for tax reporting purposes, and all transactions between the start date and the current date must be entered before the accounting system can be useful. Choosing a start date that is closer to the current date equates to fewer transactions to enter in the new system, but the data still needs to be accumulated and summarized to produce accurate starting balances.

No system: Calculating balances from scratch

If you have no accounting system, or have been struggling with a check register and hand-written invoices, you will still need to determine a start date and calculate balances as of that date from whatever records you have. A good place to start is with a reconciled checking account balance as of the start date. Begin with the balance per the bank, add deposits in transit (those not shown on the bank statement) and subtract outstanding checks (uncleared checks). The accounting system setup interview will prompt you to enter a beginning balance when creating your bank account.

Next, review amounts due from customers as of the start date. Include customer balances that were due on the start date but have since been paid. You will need these balances to record the subsequent payment receipts and deposits. As you create each customer record in the accounting system setup, you will be able to enter the customer’s beginning balance as of the start date. Follow the same steps with bills due to vendors as of the start date, even if they have been paid. You will enter these bills when you create vendor records. Checks written after the start date that pay bills outstanding on the start date will be applied to the vendor's balance instead of applying to an expense account.

4. Setting up your financial accounts

You need to decide which accounts you want to have as part of your accounting system. All businesses have general ledger accounts (accounts that are used to summarize and categorize financial transactions). These general ledger accounts are commonly referred to as "accounts" or "financial accounts," and are listed in your chart of accounts. Most accounting software programs will provide recommendations for your standard chart of accounts, from there you may then add to the chart of accounts to accommodate specific needs for your business, such as separate revenue and cost of sales accounts for labor and materials.

Most accounting programs walk you through the process of creating financial accounts and entering beginning balances.

When you select a business type in the Company Setup Wizard, the program will recommend a standard chart of accounts based on your business type, which is an excellent starting point. You can add or delete accounts from the list to suit your business requirements. After you choose which accounts will be part of your system, you'll enter opening balances for each of them. Remember, account balances for an existing business need to be calculated as of a specific point in time, usually the close-of-business on the last day of a fiscal period. You then create and enter balances for general ledger accounts, set up customer and vendor records, and enter inventory items, quantities, and costs.

After you select your accounts, review the following list to see if any of these accounts apply to your business:

- Inventory of goods held for sale to customers.

- Fixed assets: furniture, fixtures, equipment, and vehicles owned by the business

- Other assets: patents, trademarks, copyrights, or start-up costs.

- Business credit card accounts. (As with accounts payable, calculate the balance due as of the start date, not the current date. Begin with the most recent credit card statement prior to the start date; add any charges before the start date that are not reflected on the statement, and subtract any payments made but not posted on the statement to get the balance due as of the start date.)

- Balance due on a business line of credit.

- Sales taxes payable.

- Payroll taxes payable.

- Notes payable to banks or other creditors.

When placing a value on inventory, fixed assets or other assets, the actual cost should be used. If the asset has depreciated, the lesser of cost or current market value should be used, but appreciation on assets is not recognized until the asset is sold. Liabilities are valued at the amount owed as of the start date.

Entering accurate asset account balances will increase your equity, and entering accurate liability accounts will decrease your equity. Your accounting program uses the equity account Open Balance Equity to track changes in equity as the asset and liability accounts are created. You can be confident that if your asset and liability accounts are accurate, your equity balance will be correct. Your accountant may want to reclassify the opening balance equity into accounts like Paid in Capital or Retained Earnings, but total equity will be left unchanged.

5. Input transactions from start date and current date

The next step is entering transactions. Since you've calculated your beginning balances, this process should be simple. The process of entering transactions is centered on the bank account, since virtually all transactions eventually affect the bank account.

- Enter transactions month-by-month, take time to reconcile your accounts at the end of each month.

- Create invoices and record payments received against those invoices or beginning customer balances, then make the deposits to the bank account.

- Enter bills, payments made on accounts payable and record checks written out of the bank account.

- Use your vendor statements to enter finance charges and verify that your balances agree with your vendors' balances.

As you complete each month, reconcile your bank statement, credit card, and vendor account balances to verify that all amounts have been recorded accurately.

6. Verify account balances

After entering all transactions through the current date, verify that all of the account balances reflect real-world amounts by comparing them to external sources. Reconcile the bank account to your bank statement (this should be done every month); verify the credit card liability to your credit card statement. Notes payable may be verified by comparing to a loan history or loan statement from your bank. Accounts payable may be verified to vendor statements, and sending accounts receivable statements to customers will help to verify receivable balances.

On an ongoing basis, the verification steps mentioned above — reconciling all of the balance sheet accounts to external sources — will insure that your data remains accurate and help you to find and eliminate errors. Reconciling the balance sheet accounts — assets, liabilities and equity — on a monthly basis will make year-end reconciliations "just another month," and will make assembling information for your tax accountant quick and easy.

Now that you have correct balances for all of your financial accounts, you are ready to begin using your accounting system — you have a good foundation for future transactions. Data entry will be easier — and make more sense. Accounts payable will reflect the correct amounts owed to vendors, and accounts receivable will show correct customer balances. Financial reports will show correct balances for asset, liability, equity, revenue, and expense accounts and will reflect the true results of operations. The account balances will also agree with your tax returns for the previous period.