[IMGCAP(1)]Nobody knows bookkeeping anymore.
Bookkeeping is done by every business, but it often seems completely automated. The transactions flow to where they need to, generating sales reports and backup schedules, financial statements, bank reconciliations, invoices and automatic bill payment. But no one seems to understand how this is done and the significance. Question: Does this matter?
Very few people who drive understand how a car runs. They just know you have to turn the key or push a button and occasionally step on the gas or brake pedals. No one knows how a dentist works and few know how Starbucks makes a latte. And certainly if you knew how a hot dog was made, you likely would never eat one again. So why do we need to know how bookkeeping works?
The average person doesn’t need to know and probably neither does the average business owner or manager. But I believe every accountant should understand the flow of transactions, and a problem today is that most of the present generation does not. Bookkeeping is a record of the flow of transactions.
My old friend Luca Pacioli the father of accounting, gave us debits and credits in 1494. He said that for every entry there is a contra entry. Revenue is recognized by an increase in an asset—such as higher accounts receivable or cash—and an expense is offset by a decrease in cash or increase in amount owed. An innate visualization can have a skilled accountant know how the balance sheet and its components of working capital and net worth changes and how cash flow is flowing—in or out—and provide an advance peek at an impending need for additional capital or credit.
In addition to business transactions, a charting of internal transactions can indicate whether existing controls are being adhered to and are adequate, or if new ones will be needed. Quick looks can also indicate the timeliness of the transactions being entered and whether new forms of data need to be presented to those trusted to manage the operation. Understanding the system’s flow enables us to be better advisers.
This is a recurring theme for many of the staffers who work for firms today. When I started, I did write-ups, which was bookkeeping. That training gave me valuable tools to use in my work throughout my career, regardless of what I had to do. I do not believe many of today’s young accountants have this tool in their arsenal. If you agree with me, then the solution would be to develop training to teach this. If you do not agree, please post your comments and I’ll consider them and respond.
Edward Mendlowitz, CPA, is partner emeritus at WithumSmith+Brown, PC, CPAs. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.