The rapid development of accounting software is changing the role of accountants and therefore learning to use it, is understandably a key goal for students when they start studying.
If it’s one of your goals, then you might have already looked at the wide variety of programs available, and noted which ones feature most frequently on employers’ skills and experience required lists. This is where we hit a snag. Because even if you’re taught to use the software you feel will be the most useful, you may find that an employer uses a different version. Worse still, a desktop version can look very different to a cloud-based version, even if it’s from the same brand, or you could be required to use a completely different program(s) altogether.
It’s because of the ever-increasing quantity of packages available and their constant upgrades due to new innovations, that a fundamental grounding in manual accounting is vital if you want to successfully use accounting software. What I’m suggesting is that if you approach learning to use accounting software from a manual bookkeeping perspective, you can stop worrying about which software you learn because your skills will become transferable between programs.
Getting started with new accounting software
Let me explain what I mean.
My son recently started Beavers (the youngest section within the Scouts) and, as often happens when you’re known to be an accounting person, I’ve become the treasurer. The accounts are currently done at year end on a spreadsheet. So, I suggested that it might be a good idea to use software instead as whilst I’m happy to help, the existing set-up looks more complicated and time consuming than necessary.
As a charity the scout pack can’t afford the subscriptions for packages such as Sage, Xero or QuickBooks, although these are the ones I have used and am most familiar with. After some research, we came across a free package called Wave accounting software, which looks like it will process all the transactions needed; receipts, payments, bank reconciliations and some basic reports.
I’ve never used Wave before, but because I have a good fundamental understanding of double entry bookkeeping and know what I’m trying to achieve, I’m confident I’ll be able to transfer that knowledge and find my way around the software pretty quickly.
Accounting software dashboards
Lots of accounting software allows you to manage the records from a central dashboard. This can be thought of as an electronic equivalent of a filing cabinet that contain manual files. I currently use Xero and Quickbooks, both of which are cloud-based packages. A basic Xero dashboard can look this:
In QuickBooks you might see this:
And whilst there is no data in Wave yet, the default dashboard shows:
As the dashboard is usually at the heart of cloud-based software, it’s vital we understand what is happening, unseen, in the background.
How manual accounting can help
This is where manual accounting helps because all accounting software is based on fundamental accounting principles, including duality. The principle that every transaction has two equal, opposite and balancing effects is applied to all transactions which are entered into accounts in the general ledger.
The general ledger sits at the heart of a manual accounting system. Try thinking of it as the top drawer of the filing cabinet which has a file for each category of account: assets, liabilities, income, expenses and equity*. It’s supported by the sales and purchases ledgers, which are subsidiary ledgers and not part of the double entry system, but contain individual accounts for customers and suppliers. These can be thought of as drawers in the filing cabinet as well, with a file for each customer in the second drawer and a file for each supplier in the third.
If you look at the dashboards, you’ll notice that none of them include the word ‘ledger’, yet we know all software contains them otherwise it wouldn’t work. What the dashboards show instead is information from key control accounts in the general ledger, whilst hiding the actual accounts away. This is because this kind of accounting software has been designed to be intuitive and easy for business owners to use.
Different terminology for viewing bank activity
The bank accounts are the easiest general ledger accounts to identify. In Wave, the text ‘cash coming in and going out of your business’ identifies that ‘Cash Flow’ will show bank activity.
The balance on the sales ledger control account can be seen on the Xero dashboard as the total of the invoices awaiting payment under the section headed ‘Invoices owed to you’.
The equivalent is shown in the ‘Invoices’ section in QuickBooks and is the unpaid figure.
The purchase ledger control account balance can be seen as well in the Xero dashboard as it’s the total of the bills awaiting payment under the ‘Bills you need to pay section’.
The accounts in QuickBooks are for a cash business so no purchases are made on credit and therefore all the payments can be simply seen under the expenses heading.
Accounting software is no longer aimed solely at accounting professionals and the dashboards make that obvious from the start by using everyday language instead of accounting terminology. However, we’ve looked at three different dashboards and have been able to understand the key elements by relating them to our understanding of a manual accounting system. So those with an accounting background are still at a distinct advantage with accounting software.
* Accounts to do with the owner(s): capital, drawings and retained profit
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.