Five Step Bookkeeping
Bookkeeping for Tax/Financial Accounting in a Spreadsheet Template Designed perfectly for the task is a simple 5 STEP PROCESS:
1) Review Prior Work
2) Record Transactions "Accurately"
3) Categorize Transactions
4) Review the Net Income Statement
(aka Income Statement, Profit/Loss Statement)
(aka Income Statement, Profit/Loss Statement)
5) Review the Comparative Net Worth Statement
(aka the Balance Sheet)
(aka the Balance Sheet)
Step 1 - Review Prior Work
The very first time you start up a new file or a new company, you have nothing to review!! Instead, your first step will be setting up the File for Bookkeeping!
The second and subsequent time you return to your file you will start by confirming the statements all still appear to be reconciled properly and by confirming the Balance Sheet is still in Balance as it was when you finished your bookkeeping some time prior.
This is different than what might be found in all other digital solitons. They have a very rigid system for closing out books for a given month such that the data in the past can not be modified easily. We do things different. There are no rigid lockdown systems. We just keep real time monitoring on all data at all times.
Initially, this step, "Review Prior Work" was not a "formal step" in our suggested bookkeeping process. The process was initially called "Four Step Bookkeeping". Without formalizing it as step 1, users were forgetting to confirm their starting point with each bookkeeping cycle, and that lead to a little confusion when they had been futzing with their books between bookkeeping cycles, thus it was formally added as Step 1 !
Step 2 - Record Transactions Accurately
Recording Transactions Accurately has two components to it.
Record transactions in your software and
Reconcile those transactions against your bank statement header data or detail records to confirm accuracy of your recorded data.
Recording your Transactions in your software can happen via manual entry or a download of data from your bank manually or in an automated fashion. We suggest manual downloads.
The key for this data recording revolves aroudn the date for each transaction. In order to ensure a proper Balance Sheet Reconciliation later on, you MUST use the "post date" for each transaction, not the transaction date, which may be 1 to 3 days prior to the post date. (The Post Date is the date the bank formally accepted and recorded the transaction in their system).
After recording all the transactions, many people are use to a manual system where they compare data on their Bank Statement to each record and they put a check mark next to each item. The ZAP Accounting Software Bookkeeping Module offers a different method for confirming accuracy. It is an "aggregated method" where the Bank Statement Header data is entered into the software and the running balance for the account being reconciled is compared to the banks ending balance from the statement. If the two match, all the data is presumed to be present. This is in fact a better, more accurate system because with this, all data since the beginning of the file is included with each reconciliation calculation, so if someone goes back and changes or removes some data, it can be seen in real time at all times.
Step 3 - Categorize Transactions
Categorizing Transactions is very simple as long as the Chart of Accounts is not bloated and confusing. When there is only one logical category for each transaction it is very simple.
For Tax Accounting, it is recommended that you setup the income and expense categories (accounts) in your Chart of Accounts with numbered-names that align exactly with the tax forms you are required to file, be that Schedule C's, Schedule E's, 1120s or other. This makes categorization of transactions for Small Business a breeze.
You should be able to do about 80 - 90% of the categorizations without any practice. There will be 10-20% of the transactions you may have questions about initially, but once you've done those a few times and made notes of how you handled them, they too will be a breeze!
Step 4 - Review your Net Income Statement (Income Statement, Profit/Loss Statement)
In the Case of ZAP Accounting Software's Bookkeeping Module, you will click on the worksheet that contains that report, adjust the dates as necessary and review the results! It's that simple.
In addition to looking at the totals for the report, you will be looking for any data that stands out as grossly, odd, incomplete, or erroneous. If something stands out, you can drill down to see if it is correct or if an error or omission may exist.
If the report generally looks okay, you will proceed to the next step where this data is crossed checked in a unique way with banking statements that is different from the statement reconciliation in Step 2.
Step 5 - Review your Comparative Net Worth Statement (Balance Sheet)
The Balance Sheet is a "mathematical tool" used to "verify" the recordation and categorization of transactions in a bookkeeping process.
It has two halves that calculate the same value two different ways.
The purpose for the report is to perform cross-checks between 1) self-recorded data on one half and 2) third party data on the other half.
When these two halves are equal it provides baseline assurance that the self-recorded and categorized bookkeeping work, which is more granular and detailed than the third party data, was done in a without egregious errors or omissions.
The difference between this cross check system and that in section two is related to transaction categorization. In step 2, you confirmed all transaction that were supposed to be there were there. With the Balance Sheet, you actually duplicate that process AND there are mechanisms which cross check categorization of transactions, with the later being very powerful.
Technically, you can skip the reconciliation processing step 2. Any errors there would be picked up by the Balance Sheet. However, doing it helps minimize the types of errors that might be found with the Balance Sheet to Categorization only, not omissions, typos and categorization as might be the case otherwise.
NOTE: With our Software and this process there is no need to "Close the Books" or "Restrict" anything once they are reconciled. It is very easy to go back and make categorization changes or other necessary changes and easy to make sure any changes made keep everything in balance.
How does this compare to what others say?
Most CPAs, Bookkeepers, Bookkeeping Coaches and Software Vendors focus on "month end closing" for "the books". They seem to feel all relevant decisions about transactions should be made as transactions are being recorded and then cemented in each month.
This person's trademarked system for bookkeeping below is also a Five Step Process...
As a 20 year small business owner who wrote my first accounting software in 2002, step 5 is terrifying to me. Decades ago I found making changes to categorizations after something has been "restricted" to be overly cumbersome if not impossible without more expensive versions of a given software solution. Why would anyone want to lock themselves into a constraining database system that requires this when Spreadsheets have always been the better tool for the task with an entirely different, more appropriate mechanism for real time running reconciliation at all times?
== Commentary Details ==
In this video a woman describes a trademarked 5 Step Bookkeeping Process for Quickbooks.
Her steps 1-4 are basically the same as our steps 2-5 just described differently. Ours are more specific which is a bit better in our biased opinion.
Where we differ in a more major way is with the control of the data once the data process is complete.
Her Step 5 is a "restriction" process, where as we leave it all floating and free once done because our spreadsheet software template allows for that freedom easily.
With 1000 thumbs up and only 13 down, it's apparent a lot of people like the idea of a structured numbered process.
I wonder how they would feel about using a system that is more private, free, more customizable and doesn't require the data lockdown process with no negative consequences?