There is a familiar belief that only big companies are supposed to maintain books of accounts and keep their records straight. Contrary to this belief, small and medium business needs to maintain proper transaction records as well. Despite the general fact that it is mandatory to prepare books of accounts, for tax authorities, banks, directors and investors; well-maintained books of accounts help business in fraud prevention, business cost control and making accurate financial decisions. Proper books of accounts also provide business with a real-time picture of where the business is heading in terms of financial performance and financial position; since the information from books of accounts is used for the preparation of financial statements.
In business term, proper books of accounts are books containing proper records of business transactions, which are accurate, consistent, complete, timely and give a true and fair view of business affairs. In this article, I am going to focus on one quality of the ones mentioned above which is accuracy. How to improve the accuracy of transaction records in the business books of accounts. There are several accounting hacks that enable a business to improve its transaction recording accuracy on daily basis. Basically, information is considered accurate if it is correct and precise. In business manner, transactions records are correct and precise if they are properly recorded and are backed up by formal supporting documents like receipts, invoices, proformas and payment voucher.
There are four fundamental areas that a business needs to focus on in order to improve accuracy in the books of account. These sections, which are found in the balance sheet, cover almost every part of the day to day business transactions. The idea is business income and business expenses are either recognised in cash or credit. If a business offers cash sales to a customer, then the cash and sales account will be affected, and if business sale goods on credit, sales and debtors books will be affected. The same goes for expenses, cash purchases from suppliers affect the cash and purchases accounts and credit purchases affect the creditors and purchases accounts. The concept is similar to when debtors pay back the business and when a business pays back the supplier. Therefore, four fundamental areas that a business needs to focus in for a business to improve accuracy are cash, bank, debtors and creditors.
The most basic way to ensure accuracy of cash transactions is to maintain a detailed payment voucher register for expenses and a complete receipt book register for income. Payment voucher register needs to consider details like date of transaction, voucher number, payee, type of expense, clear narration for the expenditure, account affected and the amount incurred for that expense. One of the principal control on payment voucher is to ensure that voucher entries are sequentially numbered. The records need to fall in chronological order and any missing or cancelled voucher identified. Other requirements are the proper narration of transaction and a copy of a supporting document for the expenditure attached, for instance, Invoice and proforma.
One neat trick to assure the accuracy of cash transactions is to initially record the vouchers entries in an excel sheet, or a register book, and reconcile the information with physical documents before posting them in the accounting system. The same concept goes to the receipt book, the information on the receipt of money by the business on its daily activities should be evident. The receipt book should contain information like date of receipt, receipt number, party, account affected, clear narration and receipt amount. Again, the information on the physical documents must reconcile with excel records before posting in a system. This system is also good for a small business that does not use any accounting system to store transaction records.
The only way that money can move in and out of the bank account, in business, is through cheques and bank transfers. It is also possible to perform a direct cash deposit from the bank counter but other than that all the remaining transactions are bank charges and transfer fees. To ensure accuracy in the bank entries first the business must keep all information on post-dated and receipt cheques. A post-dated and receipt cheques register must maintain information like cheque date, cheque number, maturity date, payee, transaction details, bank details, maturity status and clearance status.
A business can create this cheque register on a book or, my personal preference, excel sheet. Along with bank reconciliation, the business can use the cheque register to examine the accuracy of entries in an accounting system. This register will provide business, on daily basis, information on cheques issued and not present at the bank without waiting for the end of month bank reconciliation. Of course, for this to work well, business needs access to bank statements punctually for easy follow-up.
Debtors arise when a business sales goods on credit term to its customers. In ordinary cases, debtors’ write-off happens when customers clear their debts. Reviewing of the accuracy of cash sales occurs when we are examining the accuracy of cash book entries but credit sales accuracy examination is through observation of debtors. One of excellent overall sales control is maintaining a sales register that contains all the sales invoices with their respective sales order, gate pass, delivery note, debit notes, and receipt. The sales register should maintain sales invoice information in priority to sales date and invoice number. There should be a daily reconciliation between the sales register and the physical documents to ensure that sales information is correct and precise.
It is also essential to maintain separate records for individual debtors so that a business can see the movement of debtors. The increase in debtors can be linked with the sales register and payments with cash and bank register.
Exactly like sales, creditors arise when a business makes credit purchases or incur expenses in credit term with a promise to pay in a prospective date. A business can examine the accuracy of cash purchases or cash expenses via cash book and bank reconciliation. However, just like credit sales, the accuracy of credit sales in observed through the examination of creditors. The key concept here is to manage and control of a purchases/expenses register with vital information of all purchases/expenses invoices with their respective purchase order, delivery note, credit notes, and receipt. A daily reconciliation between the purchases register and the physical documents is necessary to ensure that sales information is correct and precise.
For a business to grow and expand, it needs to make healthy financial decisions. Therefore, accurate information is necessary to business for making suitable financial choices. Most business owners ignore to take into account the value of accurate information. Take a scenario of Miss Prisca; she is a merchant who buys and sells laptop to local customers. One day she was out of the office, she instructed her assistant John to receive an invoice from the Computer World and post it to the system. She also told him to write a cheque for the new 25 Dell Inspiron laptops of TZS 6,500,000/= as in initial payment for 10 computers.
John, being very prudent, did what was necessary and dismissed the Computer World messenger. Now what happened during posting is John Cr. Bank account and Dr. Computer World account with TZS 6,500,000/= to reflect the payment. However, he initially forgot to recognise the expense in the system by debiting Purchases/Inventory and crediting Computer World with TSZ 16,250,000/=. Now in this scenario profit is overcast by TZS 16,250,000 and creditors is undercast by TZS 16,250,000. The following day, Prisca, reviewed all the entries that were posted by John into the system, and because she taught him the "register" practice it was easy to identify the mistake. Prisca compared the information from the purchase register against the accounting system and identified an invoice was missing and rectified it.
It is impossible to get rid of human and system errors in books of accounts, with proper methods a business can minimize them and improve the accuracy of financial information. This article has provided ideas on how a business can increase the accuracy of transactions in the books of accounts. However, due to the size of the topic, extensive reading is promoted. One needs to gather additional materials like business articles and journals to extend the knowledge of the subject