|Practical Computer Advice
from Martin Kadansky
|Volume 13 Issue 4||April 2019|
|Can Your Bookkeeping Be Automated?
Based on my experience doing my own personal bookkeeping for over 25 years, my own business bookkeeping for over 20 years, and helping dozens of clients with their bookkeeping, in my opinion the simple, literal answer to this question is: No.
On the other hand, compared to manually entering every transaction, I do feel that a combination of clearly-defined automation and careful review by you of the resulting transactions might save time and make your bookkeeping more efficient, depending on your situation.
In other words, I think that carefully-applied automation can help get some bookkeeping tasks done more efficiently, but if the accuracy and integrity of your bookkeeping is important to you, your involvement cannot be completely replaced by a software robot, regardless of its supposed "artificial intelligence."
You may do your own bookkeeping or you may employ a bookkeeper (or perhaps you're considering hiring a bookkeeper), but rather than writing "You or your bookkeeper" in my various examples, for simplicity I will simply write "You."
Similarly, even though your bookkeeping may be for a business, a nonprofit, purely personal, or for some other context, instead of "You or your business" I will also write "You."
My definition of "bookkeeping"
Whether you use bookkeeping software on your computer (like Quicken or QuickBooks), a cloud-based (online) bookkeeping system (like QuickBooks Online), or a spreadsheet program (like Microsoft Excel), and whether you type your transactions in manually or import them electronically in bulk, in order to properly do your bookkeeping, in your software you typically have to set up:
Then, in my experience, doing your bookkeeping for a given period of time (e.g., the past month or quarter or year) usually involves most of the following steps:
- A set of "accounts" that mirror your real-life bank, credit card, cash and other accounts, and
- A set of well-defined and distinct "categories" for you to assign to each of your income and expense transactions, which will help give them meaning in the reports that you will eventually produce.
These steps are somewhat interrelated, and some of them may include some "automation." For example:
- Gather: Collect and organize all related paper or electronic records: checkbook register, bank and credit card statements, expense receipts, income statements, etc. You might also need your appointment calendar as well.
- Manual entry: For those bank or credit card accounts where you don't have online access, you would manually type in all of the transactions for the given period into your bookkeeping system. Each transaction typically has a date, payee or payer name, dollar amount, and category, and may also have a check number and a memo.
- Download transactions: For those accounts where you do have online access, you may be able to download them all as a group and then "import" them into your bookkeeping, but only if the web site's download format is compatible with your bookkeeping program's import function. This can be more efficient than typing in each transaction.
- Download statements: With online access you could also download the statements for your bank or credit card accounts as needed, typically as PDF files.
- Categorize: Once you've decided how you'll enter the transactions, it's important to assign appropriate categories to them. For example, you may want to keep track of business and personal expenses such as postage, parking, meals, taxes, insurance, payroll, groceries, charitable contributions, etc. as well as your income, including client payments, salary, rent received, etc. This is probably the most essential task in bookkeeping.
- Splits: For those transactions that combine different things (for example, one purchase at Staples might include both supplies and furniture, or one bank deposit might contain both business and personal checks), good bookkeeping software lets you "split" a transaction into pieces so you can assign separate categories to every portion of the total.
- Reconcile: If you've entered all of the transactions for the given period into a given account, you can then compare them to your statements and "reconcile" what you've entered, i.e., confirm that what you've entered into your bookkeeping matches what your bank and credit card statements say has actually occurred in real life. However, if you don't enter every transaction exactly (e.g., if you skip some transactions, or round off the amounts to the nearest dollar), then you won't be able to reconcile that account.
- Reports: Good bookkeeping software lets you produce any number of "reports" to see your income and expenses over any period of time you choose, often organized by category, which may give you insights into how you are doing financially. Useful reports are the payoff for all the detailed work involved in bookkeeping.
- Filing: The paper or electronic documents (statements, income and expense receipts, etc.) that support or explain your bookkeeping should then get filed properly for your records.
However, your bookkeeping software has no real idea what is correct. It's up to you to make sure that each transaction gets correctly categorized.
- Some people consider downloading transactions in bulk as a kind of "automation," even though it's something that you can do yourself manually, without using any special software.
- When you manually type transactions into a bookkeeping program, over time the software will probably suggest categories (and other transaction elements) based on similar transactions that you've entered before, or by applying more general "rules" or pattern-matching algorithms that you can specify.
- When you import many transactions at once into your bookkeeping, your software may use a similar method to mechanically assign categories to many of those transactions.
What automation cannot do
In my experience, given the list of 9 bookkeeping steps above, automation can sometimes help with only 2 of them: Downloading transactions and assigning preliminary categories to them based on simple criteria. Only you have the knowledge and context to decide what the correct category should be.
For example, I cannot imagine how automation could possibly categorize any of the following correctly every time on its own, without your involvement:
Read their definition of "Automated bookkeeping" carefully
- On January 5 you spend $36 at pizza shop for a personal potluck dinner with friends, and then on January 10 you spend $36 at the same pizza shop on an identical order for food for a business meeting.
- If you have separate bank accounts or credit cards for business vs. personal, you accidentally pay a business expense (or make a business deposit) using a personal account, or vice versa.
- You make 4 separate charges at Starbucks on different days: $10 for coffee with a client (business) vs. $10 for coffee with a friend (personal) vs. $10 for a gift card for a client (business) vs. $10 to reload your Starbucks card (personal).
- On your credit card statement you see a February 3 charge for $40 paid to XYZ Corporation, but you don't recognize that name. After looking at your appointment calendar you remember that on February 1 you attended the ABC conference and you parked in the garage, which probably used company XYZ as their credit card processor, and apparently that charge didn't get processed until two days later.
- On your credit card there are two gym membership charges each month: $40 for you (personal) and $40 to the same gym for an employee (business).
- You spend $180 at Staples: $100 for a new office chair (business: furniture) + $40 for paper and ink (business: office supplies) + $20 for a cell phone gadget for you (business: telephone equipment) + $20 for another identical gadget (business: gift for client).
- You deposit $1,000 into your bank account: a $200 check from a client (business income) + a $300 tax refund (personal) + a $400 refund from a canceled prepaid parking garage charge (business) + a $100 gift from Aunt Claire (personal).
There are many vendors who market their services as "automated bookkeeping." Read carefully to learn what services they actually provide, where they store your bookkeeping data (often "in the cloud," i.e., online), at what cost, what their limits are, and beware outlandish claims.
For example, one vendor's web site declares, "Computers don't make mistakes," which is completely absurd! I have seen bank and credit card downloads with a variety of problems, including missing transactions, expenses and income reversed, and dates with the months and days reversed. Also, your bookkeeping software may not prevent you from importing the same transactions multiple times, possibly creating duplicates (or triplicates, etc.), or accidentally manually importing transactions into the wrong account. Any of these mistakes (not to mention computer crashes and data corruption) can create time-consuming problems to fix.
Another type of "automated bookkeeping" involves technology that scans documents (receipts, invoices, checks) and tries to identify the transaction information in order to save you time manually examining each piece of paper and then typing in the corresponding transaction. If such a service sounds useful, weigh carefully whether it would really save you enough time and effort to be worth the cost, your time to learn it, and your time not only to use it, but also to review the accuracy of all of the transactions that it generates.
I do think that bookkeeping automation can save time by assigning preliminary categories to transactions based on prior history or predefined rules or criteria (which, by the way, any good bookkeeper can also do for you), but I also think that there is no substitute for a real person's review, looking for mistakes and correcting them.
When it comes to your bookkeeping, you may not be faster, but you are smarter and better-informed than any supposed "artificial intelligence." Would you rather have your bookkeeping done quickly, or correctly?
I also think that automation is best used by people who understand how it works and who can handle when things go wrong, which probably will happen from time to time. And if you have a bookkeeper, I don't view automation as an opportunity to replace them, but rather as a good reason to talk to them about whether automation might improve your existing process.
Don't confuse raw bookkeeping data collection and mechanically-assigned categories with thoughtful and appropriate categorization and reconciliation.
Where to go from here
- google: automated bookkeeping
- If the idea of automated bookkeeping appeals to you, especially if you dislike the idea of doing your own bookkeeping, I recommend that you be careful that your expectations of this technology are realistic, and consider hiring a human bookkeeper.
- If you have a bookkeeper (or you're thinking about hiring one), talk to them about things that each of you might do to make your bookkeeping more efficient, whether they involve automation or not.
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I love helping people learn how to use their computers better! Like a "computer driving instructor," I work 1-on-1 with small business owners and individuals to help them find a more productive and successful relationship with their computers and other high-tech gadgets.