How do I keep accounting records accurate over time?

What makes a set of books accurate?

AS 1105, the PCAOB's audit-evidence standard, classifies the assertions management makes in representing that financial statements are fairly presented, among them that recorded transactions occurred, that everything that should be included is, that amounts are appropriate and that components are properly classified. Adapted to your own books, those four become the first three properties below; agreement with outside evidence and traceability, which the standard does not list as assertions, complete the five:

• Complete. Every transaction that happened is recorded once, and nothing that did not happen is recorded.
• Right amount and date. Each entry carries its document's amount and sits in the period it belongs to.
• Right category. Each entry sits in the account your written conventions assign.
• Agrees with outside evidence. Balances match what banks, card issuers, lenders and vendors report and what customers pay or confirm, apart from differences you have identified and dealt with.
• Traceable. Each entry leads to its document, and each document to its entry.

Books that balance have passed none of these tests: OpenStax's Principles of Accounting notes, in its trial balance section, that books can have errors and still be mathematically in balance. AS 1105 says that, in general, evidence from a knowledgeable source independent of the company is more reliable than evidence obtained only from internal company sources, and evidence an auditor obtains directly is more reliable than evidence obtained indirectly. A bank statement is such a source; a report your software builds from its own ledger is not. Whoever checks the work should get each statement straight from its issuer, not as a copy from the person whose work is being checked.

How do accurate books drift?

Six mechanisms undo accuracy. Backlog and a change of person are easy to notice; the other four build up silently, so checks run on a schedule, not when something feels wrong:

• Backlog. Receipts, feed items and questions wait, and the older an item gets, the harder its support is to find.
• Missing or unlinked documents. The entry may be right, but nothing shows it.
• Classification drift. Similar items land in different accounts as a convention fades, a new person guesses or a suggested category is accepted unread.
• Duplicates and omissions. A transaction is entered by hand and again from a feed or import, or a cash purchase or paper bill is never entered.
• Changes after reporting. An edit, deletion or structural change, such as pointing an item at a different account, alters a period whose figures already went out.
• A change of person. Conventions kept in one person's head leave with them.

Which checks catch each kind of drift, and what does passing one prove?

Each check proves something about some properties and nothing about the rest:

A change of person is caught by running every check early, as the next section explains.

OpenStax's bank reconciliation section describes the reconciliation as the internal report that explains and documents any differences between the bank's balance and the company's; prepared accurately, it leaves both balances the same amount. Among the causes of differences it lists items the bank records first, such as service fees and interest, which must be journalized in the company's records, and errors by either the client or the bank. A statement check therefore passes only when every difference is named, the named differences bring both balances to the same amount, items the bank recorded first are in your books, and any error of your own it found is corrected or routed as the discrepancy table below sets out. Which accounts to reconcile, and how, are separate questions.

AccountingTools' definition of a source document notes that pre-numbering lets a company investigate whether any documents are missing. That reaches only work that starts on a numbered document made outside the books, such as a work order; numbers your software assigns as you enter invoices reveal deletions, not unbilled work.

Your accounting basis decides what the open-item check covers. IRS Publication 538 describes the timing for tax reporting: under the accrual method, income is generally reported when earned and expenses deducted when incurred; under the cash method, when money is received or paid. Accrual books carry receivables and payables: agree payables with vendors' statements, and receivables with later customer payments, remittance advice and replies to the statements you send. On the cash basis, unpaid invoices and bills are not yet income or expense, so keep them on an open list, check it the same way, and see that each reaches income or expense once, when paid.

How often should each check run for your business?

No single frequency suits every business. Three limits bound it: a check cannot run before its evidence exists, so a statement check follows the statement; each check covering a period should be scheduled to finish before that period's figures are due to anyone; and a statement check should run soon after its statement arrives, since an error by the bank, card issuer or vendor can be raised with them only once found. Check your account terms for any time limit on reporting errors. Within those limits, check more often where risk is higher. AS 2201, the PCAOB's standard for auditing internal control over financial reporting, makes the evidence an auditor needs about a control depend on the risk associated with it, and lists factors that affect that risk. Read as reasons to check your own books more often, four apply:

• Changes in the volume or nature of transactions. A new product, payment processor or busy season changes what the books absorb.
• A history of errors. An account where checks have found errors is checked sooner.
• The nature and materiality of possible misstatements. Checks guarding large or sensitive amounts run more often.
• Changes in key personnel. A new bookkeeper, owner or outside firm calls for an early full cycle of every check.

Lengthen an interval only after several clean cycles with none of these factors changed; shorten it when one changes or a check finds an error.

Between cycles, three counts show accuracy slipping early: items waiting in a feed's review queue, the uncategorized or suspense balance, and documents received but not yet attached. When one grows week to week, run the check it points to.

What might one small business's schedule look like?

Take an invented example: a two-person landscaping business whose accrual books an outside bookkeeper keeps. It has a checking account and credit card on bank feeds, with some rules set to post automatically, an equipment loan, about 250 feed transactions a month, customers on 30-day invoices, a numbered work order for every job, and a quarterly report to its lender. Its schedule could be:

The bookkeeper runs every check but the support sample, which the owner runs; the owner reads all the evidence, checking statement evidence against statements the owner gets directly. Winning commercial contracts, adding a card processor or changing bookkeeper would bring the affected checks forward.

How do you keep every entry traceable to its support?

OpenStax's internal-controls section says an effective internal control system maintains proper documentation, including backups, to trace all transactions. Four habits make the link from entry to document demonstrable:

• Give each document an identifier and record it on the entry, or attach the document to the entry.
• File each document when its entry is made, not at year end, and keep the backup outside the bookkeeping tool.
• Where an entry has no document of its own, note on it what happened and who can confirm it.
• Test both directions. AccountingTools describes vouching as working backward from a recorded transaction to its source document to test existence, occurrence or validity, and tracing as following a source document forward into the records to test completeness.

A correct entry whose document cannot be found cannot be shown to be correct to a lender, a buyer or the next bookkeeper. Which records you must keep, and for how long, is a separate question.

What do you do with a discrepancy a check finds?

Find the cause first. A difference with no known cause is investigated, not routed; forcing agreement with a balancing entry only hides it. Once the cause is known, route it:

The last route exists because changing a reported period opens a gap between the books and what someone relied on; where such an item is corrected, and what happens to statements already given out, is a separate question. A difference whose cause cannot be found goes to the owner; it is not accepted unexplained.

What stops accuracy you have achieved from slipping away?

Checks find drift after it happens; four habits act on its causes:

• Consistent classification. Keep a written list of where each recurring kind of item goes. Change a convention only at the start of a period, with a dated note of what changed and why, so comparisons across the change can be adjusted.
• A stable account structure. Add new accounts or items rather than renaming, merging or repointing ones in use. Intuit's QuickBooks Online help on changing an item's account says that changing the income account for inventory items also affects prior transactions. Its alternative, a new item with the correct income account, is then put on each past invoice you want to update, which changes those periods too. Use a new item on new transactions only.
• Limits on who may alter recorded items. Give each person only the access their work needs. OpenStax's internal-controls section notes that password protection lets a business keep employees from accessing systems and changing data without authorization.
• Finalizing completed periods. Once a period's checks pass, finalize it, as the next section explains.

Where one person records, pays and reconciles, the checks that stand in for a second person are a separate question.

Should a checked period stay open or be finalized?

A period left open can be changed by any later entry, deletion or structural edit, often unnoticed, so the checks it passed stop describing it. Intuit's Year-end guide for QuickBooks Online says that when you finish the year-end review you can close your books, which prevents unwanted changes that could affect your reports before you file your sales tax; the same step suits any period whose checks have passed. Finalizing makes a later change a deliberate act, not an impossible one, and whether it is shown to anyone depends on the tool, so the change review still runs on finalized periods, and on an open period before its figures are relied on again. How to close and lock a period is a separate question.

How can you tell whether your books are accurate right now?

Answer with evidence, not impression. You can call the books accurate as of a date, to the extent these checks reach, when you can produce all of the following:

• A reconciliation to the latest statement for every account that has one, with every difference named and dealt with
• Open items agreed, with payables matched to vendor statements and receivables to later customer payments and replies, or a cash-basis open list checked the same way
• A completeness scan with every gap explained
• A classification review showing nothing uncategorized, totals compared with earlier periods and a sample checked against the written conventions
• An empty feed review queue, or a dated list of what is waiting and why
• A recent support sample with every item found in both directions
• A change review showing that every period whose figures went out, finalized or not, still says what was reported

Whatever you cannot produce marks the part whose accuracy is unknown, so the honest answer is "accurate through this date, except for these accounts".

What changes when an outside bookkeeper or a bank feed does the work?

An outside bookkeeper can run every check, but accuracy tends to fail at the boundary between you. Some duties stay with the business: making sure every account and document reaches the bookkeeper, since an account they do not know about escapes every check; reporting transactions that leave no document; knowing which figures went to whom; getting statements straight from the bank, card issuer and lender, and comparing each reconciliation's statement balance with them; and reading the evidence each check produces. Write down who runs each check, when its evidence comes back and who reads it.

With bank feeds and rules, completeness gets easier and correctness harder, because entries can appear without anyone deciding anything. Intuit's QuickBooks Online help on bank rules says that if you turn on auto-add, QuickBooks applies the rule to any downloaded transaction it applies to and posts it immediately; its page on categorizing bank transactions says downloaded transactions go to a Pending tab with a suggested category for each. Add a check aimed at what the automation decided: read what rules posted since the last check, clear or explain everything pending or unmatched, look at anything excluded, catch items entered by hand and again from the feed, and review the rules whenever a vendor, account or convention changes.

How do you keep the practice working when the person or the tool changes?

OpenStax's internal-controls section says that as responsibilities, staffing and technology change, internal control systems need to be constantly reviewed and refined. The practice survives a change only if it is written down somewhere the business controls. Record these:

• Category conventions, with a dated log of changes
• The account structure and why each account exists
• Feed rules and what each is for
• Document naming and filing
• The check schedule, with each check's owner, interval and evidence location
• Which periods are finalized, and which figures went to whom

At a change of person, run a full cycle of every check before the handover, then let the newcomer run the next cycle from the notes alone; whatever they have to ask belongs in the notes. At a change of tool, prove the new records agree with the old before relying on them: compare the profit and loss for each period, and the balance sheet at each period end, from both tools on the same basis; check receivables, payables and the totals; and check that rules, user access and finalized periods came across.