Programs like Quicken that are designed to help you manage your personal finances use single entry accounting. That means for example, that when you spend $20 on postage, you make an entry (a single entry) that records only the expense for $20. You don’t make an entry showing where that $20 came from.
Did you pay with cash? Did you write a check? Or did you use a credit card? Which one?
Wait a sec…I think I hear you mumbling…what’s that you’re saying? You write a note in the memo field when you make your entry that says the check # or name of the credit card so you know how you paid. Well, that’s better than not writing the memo at all, but it’s not quite the same as keeping track of accounting information in a program that uses double entry accounting and requires you to record the complete details of the transaction.
The benefits of a double entry system
Let’s assume that you paid for the postage with a check. What the second entry does is to take the $20 out of your checking account and reduce your available balance. That makes it possible for you to keep track of (and reconcile) your bank account.
Another reason I recommend that you use a full-fledged accounting system like QuickBooks is that it has security features like audit trails. An audit trail shows you how and when a transaction was modified and who changed it.
The problems with spreadsheets
Compare this with Microsoft Excel, for example. One of the biggest reasons that I don’t like using spreadsheets for accounting is that there’s no audit trail. You can make entries, change them, move them, and even delete them without leaving any tracks.
Another reason is that there’s no way to verify that any of the formulas you set up are correct. If you’re entering expenses in a spreadsheet and you put in a formula (say in cell B39)to total up a column of numbers (say from cell B1 through B34), there’s no way that the spreadsheet knows that you meant to total up the expenses through cell B37.
You won’t get an error, because your formula is valid; it just won’t give you the correct total. And you won’t realize there’s a mistake. To me, that’s scary!
When you’re running a business, even if it’s only part-time, you need to use a full-fledged double entry accounting system.
Another reason that I recommend double entry accounting systems is because of their extensive searching and reporting capabilities. With a program like QuickBooks, for example, it’s quick and easy to find out
- where you bought your last order of blue widgets
- when it was shipped
- what check number you used to pay for postage
- how many blue widgets you sold last month
- how many people who bought blue widgets also bought an ebook explaining how to use them
It’s pretty hard to do this if you’re using a spreadsheet. You’d have to look through all your entries manually, hoping to find the data you’re looking for. The reason it’s easier to do this in QuickBooks (without getting TOO technical) is that the program stores your information in a structured way that’s designed with this purpose in mind. It arranges and organizes your data for you automatically so you can ask the questions you need to get the specifics you want.
Keeping your data in an accounting system rather than a spreadsheet is going to make it a lot simpler for you to manage your business. Yes, you might need some initial training (and remember, you can always hire someone to do the data entry), but I think the results will be well worth it.
Your balance sheet helps you mange your business
Another thing that a double entry accounting system forces you to do is keep a balanced set of books. That means you’ll have both a balance sheet and an income statement (P/L) to help you make decisions and manage the company.
Just as an aside here, please…try not to get hung up on some of these accounting terms like balance sheet. I’m sorry, but there’s no other name for it so I have to call it that. Check out the glossary of accounting terms where I explain some of this accounting lingo.
Programs like Quicken let you record your income and expenses, but they don’t give you a balance sheet.
There are two major reasons why you need to have both. The first is that you absolutely must know your available cash balance at any point in time. And you need to make sure that you’ve recorded ALL of your transactions. The best way I know to do that is by reconciling your bank and credit card statements.
And in order to do those reconciliations, you need to set up asset and liability accounts on a balance sheet. Your checking account is an asset that represents your cash. Your credit card account is a liability that shows how much you owe (or how much you’re liable for) to MasterCard, Visa, American Express, or whoever.
The benefits of reconciling your bank statement
Without reconciling your bank statement, you won’t know if you’ve made any mistakes when entering the data. If you use Quicken or Excel to keep track of expenses and (for example) you record check # 1234 as a payment of $456.78 for a case of blue widgets you bought, but the amount you paid was really $1445.78, you’ll probably never know that typo was made.
I can almost hear you saying…”reconciliation…that’s another one of those scary accounting words.”
But that’s another thing about double entry accounting systems. They have a built-in feature that makes it real easy to do the reconciling or balancing. Yay!!!
The second big reason you need to have a balance sheet is that you need to know the dollar amount of unpaid bills (or liabilities) you have at any one time. I’m not talking just about your credit card balance here. There’s also your obligations to the government such as sales taxes and payroll taxes.
If you only have the income statement to use to see how your business is doing, you can easily be fooled. You have no way to be certain that all your sales and purchases are recorded or that they’re recorded accurately. And you have an incomplete picture of your results.
Your income statement could show that you made a profit of $4000 last month and you could think things are going great. But if you had a balance sheet that said you owed $600 in State and local sales taxes and you had only $100 in the bank (because you just made a big inventory purchase), you’d have a different picture of how you were doing.
I can’t stress enough how important it is for you to choose the right software program. Having the right tool for the job is the most effective way to get the results you want.