Generating Automated Reports

Reports! Where are the Reports?!

So, you or your bookkeeper have been diligently recording your transactions all month. Everything is in there. What now?

Remember that one of the main reasons we engage in bookkeeping at all is so that we can generate reports to assist in managerial decision making. This is because looking at an individual transaction only tells you about that specific transaction and looking at the whole data set won’t show you anything other than how busy your bookkeeper is.

By generating specific reports we can use the accounting platform or software to filter, categorize and display information in ways that are insightful and useful.

Let’s look at a few common report types that would be useful for a business owner or manager.

Pro Forma Financial Statements

Balance Sheet/Statement of Financial Position

This report will display the balances in your company’s asset, liability and equity accounts as of a particular date. Any transactions dated on or before that date will be included but anything posted with a date after the report date will not. In this way it is a “snapshot” of where the company was financially on that particular day. This is useful for computing various ratios which can communicate the financial health of the business, such as liquidity and solvency.

Income Statement/Statement of Profit & Loss

The income statement displays a business’s revenues (sales), expenses, gain and losses over a given period. It is prepared on an accrual-basis, meaning that transactions are displayed when they are dated (or occurred) rather than when cash was collected or paid out. When the expenses are accurately matched to the revenues that they generated the income statement is prepared correctly and shows us the level of profitability (or unprofitability) a business achieved over a given time period (month, quarter, year, etc.).

Account Reports

For any given account on either the balance sheet or the income statement you can click on the balance to open a report of all of the transactions posted to that individual account. This can be useful for understanding specific accounts and drilling down on surprising balances or results to detect underlying problems, successes or *gasp*…bookkeeping errors!

Aging Reports

Aging reports show how long it has been since a specific transaction date (or due date) by comparing today’s date to that date and categorizing the transactions based on their age. The most commonly used aging reports are the Accounts Receivable Aging Report and the Accounts Payable Aging Report.

Receivables

Groups open (uncollected) invoices in 30 day (roughly monthly) periods based on how long it has been since they are due. The longer a receivable goes after its due date without being collected, the less likely it is that it will be collected at all. The A/R aging report can identify invoices that are in danger of not being collected as well as those that are unlikely to ever be collected. This will tell you where to focus your collection efforts.

Payables

By knowing how long it has been since your bills were due, or if they are not yet due you can effectively manager your cash flow. This report will show you which bills are overdue which can identify which suppliers may be close to cutting off service or taking other collection actions.

Sales by Customer

This is a useful report for determining your best customers. Pareto Analysis or the “80/20 Rule” often shows that 20% of a given data set produces 80% of occurrences. For example, 20% of a business’s customers often produce 80% of their revenue, while another 20% often produce 80% of the headaches. Keep an eye on which customers are key to your success and make sure you keep them happy!

Expenses by Vendor

Like the sales by customer report, this report shows you where most of your expense dollars are going. This can help you identify key supplier relationships to protect and enhance. It may even help you identify areas where you may have some leverage to negotiate discounts or other preferential terms.

Comprehensive Reports

While the previous report types show us specific data there are times where you, your accountant or financial analyst may want to see “everything.” These reports can be generated in a number of ways and are useful for higher level analytics in exported CSV format to be analyzed in programs like Excel, Power BI or Tableau.

Transaction List by Date

Every transaction in a given period listed chronologically.

Audit Log

Every transaction in a given period including details about its creation, subsequent edits, voiding or deletion. These details usually include which user altered the transactions, on which date and at what time.

General Ledger

Each account on the balance sheet and income statement with every transaction adjusting its balance listed underneath it (each transaction will be in at least 2 places. Double-entry bookkeeping, remember?).

Journal

This report will include all transactions that were entered via Journal Entry rather than through an entry screen (bill entry screen, sales receipt entry screen, etc.).

Trial Balance

The balance in each account of the balance sheet and income statement as of a specific date. Accounts with a debit balance are shown in one column while accounts with a credit balance are shown in another.

Other Things to Remember

Dates

Always check the date settings on your report after you run it. Many platforms have a default date range which the report will reset to, especially after a new transaction is entered.

Remember that the shorter your time frame the more impact each transaction has, which can make ratios and percentages go out of whack. Daily or weekly reports will often be too erratic to be useful, unless you have a realistic benchmark expectation already.

Comparisons

Most reports can be formatted to include additional columns, such as a comparison to the previous period or year. With the previous period comparison the accounting program will show you the balance for the same account after subtracting the same number of days in your report from the start and end dates (ex. an Aug. report would start on Aug. 1 and end Aug 31; a previous period comparison would subtract 31 days from the end and start dates to use July 1 and 31 as the comparison period). Most platforms are able to automatically adjust once they recognize a “monthly” or “quarterly” report but be careful if you are using an irregular period as the program will only subtract the same number of days.

Previous year comparisons are simpler; they will just show the same amounts from the period that occurred one year prior.

These automated comparisons are often useful for showing how performance and financial position have changed over time.

Filters

Most reports can be filtered to show only some of the data contained in the data set. The most common filter is the “name” filter, which will allow you to see the data pertaining only to specific customers or suppliers.

Ensuring that your bookkeeping is accurate will mean that you can actually use these automated reports to assess the performance and health of your business. These “stock” reports also serve as the best starting point for customizing your business’s reports to show you exactly what you need to know to make effective managerial decisions.

On the flip side unreliable data will produce unreliable reports. Garbage in, garbage out. If you need those reliable reports on a regular basis then consider Toronto Bookkeeping Plus for your outsourced bookkeeping, payroll or training needs.

Next Topic: The Bookkeeping Cycle

Previous Topic: Double-Entry Bookkeeping

Double Entry Bookkeeping

What do Quickbooks, Xero, Wave and all other off-the-shelf accounting software packages have in common with coded-from-scratch, all-the-bells-and-whistles, fully-customized accounting applications? They are all based on the system of Double Entry Bookkeeping developed in Venice during the Renaissance. First written of by Franciscan Friar Luca Pacioli it has been in use since the fifteenth century at least and may be even older.

The system of double entry bookkeeping relies on two foundational rules:

  1. Every entry maintains the balance of the fundamental accounting equation (FAE). Namely that Total Assets = Total Liabilities + Total Shareholder’s Equity
  2. That every entry will change the balance in at least two accounts (hence the “double” in double entry bookkeeping)
Types of Accounts

If you’re completely new to accounting and bookkeeping you may need a bit of a primer. At the most fundamental level we have only two types of accounts: temporary and permanent.

Temporary accounts, also called Income Statement accounts, appear on the Income Statement (a.k.a. the Statement of Profit and Loss). They are called temporary accounts because they track balances during the accounting period (usually one year) and are reset to zero at year-end and start all over again for the new year. The Income Statement displays at least two and as many as four different types of temporary accounts: Revenue (sales), Expenses (including cost of goods sold), Gains (if any) and Losses (if any).

Permanent accounts, also called Balance Sheet accounts, appear on the Balance Sheet (a.k.a. the Statement of Financial Position). They are called permanent accounts because they track balances which do not reset at the end of the fiscal year. Their balances are continuous in time, or permanent, and are adjusted by transactions only and never intentionally reset at a point in time. The Balance Sheet displays three types of permanent accounts: Assets (what the company owns or controls), Liabilities (what the company owes through bills, debts and other obligations) and Shareholders’ Equity (funds invested by shareholders and accumulated profits less distributions of those profits). All accounts on the Income Statement are reset at year end and Net Income is transferred to the Shareholder’s Equity portion of the Balance Sheet. In this way everything in the Income Statement is represented on the Balance Sheet.

Adding Transactions

The job of the accounting team is to record what happens throughout the year to ensure that they can report accurate balances for each of the 7 types of accounts listed above (4 temporary plus 3 permanent). This is done by recording every transaction that the company executes. A transaction occurs when there is an exchange between the company and an outside party and does not necessarily involve cash. Each one of these transactions will affect at least two accounts. Here’s an example:

Let’s say your company provides services. You do the work and then bill your client. The client pays you within 30 days. When do transactions occur and what should the entries be?

  1. You’ve finished doing the work and are ready to bill the client. When you enter the invoice you will be increasing your Revenue total for the year by the amount of the invoice. You will also be increasing your Accounts Receivable (Trade Receivable) balance by the value of the invoice. You will keep the FAE in balance because Total Assets and Total Shareholder’s Equity will increase by the same amount.
  2. The client pays this invoice. When you record the payment you will increase your Cash balance because you’ve been paid. You will simultaneously decrease your Accounts Receivable balance because this invoice is no longer outstanding. The FAE will stay in balance because you are increasing the value of one asset (Cash) and decreasing the value of another asset (Accounts Receivable) so the Total Asset balance will remain unchanged.

Before computers it was possible for entities to track their financial performance and keep track of all of their balances using this method with nothing but pen and paper (or quill and parchment?). The entries were known as Journal Entries which were added to the General Ledger (GL). The GL was a record of all transactions and was used to compute balances and generate financial statements.

Once accounting systems became computerized there was an added benefit to this system: database creation. By creating form entry screens which simplified data entry (ex. Invoices, Sales Receipts, Bills) the user could not only track financial statement balances but could also create a database of names, addresses, product sales and more. But at the back of all of this added functionality the same core double-entry bookkeeping concept is used. If you can understand this concept then you will be able to use any kind of accounting program – it will only be a matter of figuring out where to click.

Journal Entries vs. Forms

The Journal Entry screen serves as a type of “manual override” in accounting systems. It can be used to enter any transaction into the system in the same way those Renaissance merchants used to centuries ago. But because there are fewer user controls to protect you against an incorrect entry the risk for errors increases.

So should you use Journal Entries in your bookkeeping? Not if you can help it. Journal Entries have their place in modern accounting but you’re foregoing the additional data which is captured when you use the correct entry form. Additionally, you’re exposing yourself to an increased risk of error, threatening the integrity of your accounting data. Regular transactions should be entered using the various forms (invoice, payment, sales receipt, bill, bill payment, expense, transfer, etc.). Refer irregular transactions to your accountant; they may recommend a journal entry but then you can rely on its accuracy, suitability and correctness.

So by using the forms are we guaranteed to have an accurate set of accounting records? No, not necessarily. It’s possible to mess up using the form entries by not understanding the impact of each of your line entries or items. Remember, in double entry bookkeeping you are always affecting at least one other account. If you’re entering a bill you just received you’re correctly increasing the Accounts Payable balance but you may be categorizing the expense incorrectly on the line item. Some accounting programs allow you to post bills to account types other than expenses (liabilities, asset or revenue). Or for another example, using an incorrectly set up product in your invoice entry can post the account to the wrong sales account. These types of errors can lead to incorrect entries, and subsequently incorrect data and incorrect reports. “Garbage in, garbage out,” as they say.

Preventing Errors

By using the system of double entry bookkeeping we can keep track of our accounting data accurately. But we risk errors if data is entered incorrectly. Every entry must be balanced, having one side (the one you’re thinking about when you make the entry) and a balancing side or “offset” that you may not have considered.

Whenever you’re making entries remember to ask yourself: “What is the other side of this entry?” This simple step can save you headaches down the road and will help you understand your entries and accounting records more intimately. For example, if you’re posting bills make sure they are being categorized to the correct expense and the sales tax is being accounted for (you get a reduction to your HST in Ontario for HST paid to suppliers so it’s important that these entries also reduce your HST payable liability and prevent you from overpaying). Therefore, you need to split the transaction into its components and make sure you are adjusting the 3 correct balances (Accounts Payable, HST Payable, and the Appropriate Expense).

Double-entry bookkeeping is the ingenious system by which we efficiently document our transactions, maintain our General Ledger, and permit the production of reports and Financial Statements. It has a level of complexity but it isn’t voodoo, magic or rocket science. Now that you understand it a bit better, take a minute to review some of your transactions and see the accounts that are affected in each transaction. You may even be able to spot some errors to fix!

If reading about this time-tested, universal system of bookkeeping has made your eyes glaze over, not to worry. At Toronto Bookkeeping Plus we can perform all of your bookkeeping remotely and reliably. If you’ve had it with doing your bookkeeping yourself then contact us today for your free consultation. We also provide training for bookkeepers that is customized to your company’s accounting cycle platform and configuration. If you or your staff just need a little extra help before carrying on this can be great option with lasting value. Request your free quote today!

Previous Topic: What is bookkeeping?

Next Topic: Generating Automated Reports

Bookkeeping: What is Bookkeeping?

Bookkeeping is the process by which a company’s accounting records are built and maintained. It is the process of recording, organizing and storing your company’s accounting data which can be used to produce reports or verify details when needed. This is achieved by recording each and every transaction a company undertakes. Common examples include collecting payments from customers and depositing funds in the bank, paying for services, purchasing long-lived assets, receiving loan funds, making loan payments, distributing funds to owners and many others.

A transaction occurs when an obligation arises for cash or other economic resources to flow from one party to another. This is important because it means that transactions often occur before or after cash actually changes hands. When you receive a bill you have to pay, that transaction has occurred and you need to record it in your books even if you’re going to pay it later. The same applies when you issue invoices that you’ll collect payment for later, when you pay for a year’s worth of insurance up front or when you know you’ll be billed later for an ongoing service. This is known as accrual-basis accounting because you record a transaction when the requirement to pay happens, or accrues, rather than when a cash flow occurs. This produces much more accurate financial reports which can be used for more effective decision-making.

 If the question is “why do we do this?” or “so what?” the answer is that without timely, accurate, bookkeeping there is no way we can produce reliable financial reports for internal and external users. It’s like trying to use a map without being certain the map is accurate; you could move forward on the faith that it’s right, but you risk getting lost, hitting unrecorded obstacles, bypassing key resources or mismanaging your supplies because the map is not to scale. It is far better to gather reliable information before you plan your journey just like it’s far better to ensure your accounting records are accurate before you need to rely on that information to make judgments about the health, future and success of your business.

Businesses are also required to submit numerous reports to outside users such as government, government agencies, industry regulators, financial institutions, lenders, investors and potential investors. If these reports are inaccurate you may risk fines, penalties, broken relationships or even allegations of negligence and fraud.

In short, bookkeeping is the foundation of accounting and without the building blocks (accurately recorded transactions) we can’t build financial records in which we have the necessary confidence to move forward.

An added benefit of modern bookkeeping is that with all of the details recorded in each transaction you incidentally create a large database which is ripe for business analytics. This review process can reveal key insights about a myriad of things such as customer preferences & behaviour, hidden weak links & inefficiencies, or unsung heroes & unexploited advantages.

High quality bookkeeping is not a discretionary item for your business – it is a necessity. Sign up for our email list to receive blog posts like this one every month and enhance your understanding of bookkeeping and payroll – core functions for your business. If you decide that a professional, reliable, remote bookkeeper is just what your business needs then we hope you’ll choose Toronto Bookkeeping Plus – we’re here for you!

The next topic: Double-Entry Bookkeeping.