What Does a Bookkeeper Do and How to Check Their Work

What does a bookkeeper do?

A bookkeeping professional accounts for a business’s finances.

This includes:

  • categorizing financial transactions
  • creating invoices (if needed) and
  • manage accounts receivable and accounts payable
  • month-end and year-end journal entries to close the books.

Then they should prepare financial statements for the small business.

The end result of managing all this financial data should give business owners financial reports like a profit and loss statement, balance sheet and cash flow statement. These financial reports show the business’s financial standing.

These bookkeeping tasks are done through accounting software like QuickBooks or Xero. This kind of accounting software should have additional reports to monitor the financial health of the small business.

Understanding Bookkeeping

“My old bookkeeper was terrible. How much do you charge for bookkeeping?”

I’ve heard that question a good amount of times as an accountant. What does a bookkeeper do? I often what to ask that in response to see if they really get it. The problem is the bookkeeping isn’t a commodity. It’s a service. People do the bookkeeping and they are not created equal.

The cheaper bookkeepers tend to not understand what bookkeeping entails. There are deliverables to that service. So if you are paying for bookkeeping and have no idea if it is being done, what do you do?

If you think bookkeeping is only categorizing daily financial transactions, you’re in for a rude awakening. It involves reconciling the business bank account or accounts, closing monthly periods and journal entry adjustments.

If you have an accounts payable and receivable, there further work needed to do. Have machinery or other assets? Depreciation schedules need to be in place. Loans? Interest expense has to be allocated appropriately when you make payments.

A Bookkeeper’s Knowledge

What does a bookkeeper do? First understand what they should know. A bookkeeper should have an associates or bachelor’s degree in accounting. A bachelor’s degree shows they’ve obtained understanding of accounting principles like double entry bookkeeping or what a general ledger is.

Do not accept bookkeeping services from someone that does not have understanding of a general ledger or the accounting system. Bookkeepers record daily transactions, but that’s just data entry. Almost anyone can do data entry and pose as a bookkeeper. Creating financial statements requires a financial professional.

Do your Own Bookkeeping

Even if you are planning to do your own bookkeeping, you need to understand these job duties. They are vital for tax filing and reporting accurate tax returns. The negligence of your business’s financial records could lead to an Audit.

As an accountant myself, here are five areas that show your bookkeeper has you covered. It’s the very things I look for to determine how bad it is or isn’t when reviewing a potential client’s books.

Having too much to categorize can cause mismatching, errors and tax filing delays

  1. Is There a lot to Categorize?

Accounting software is modeled differently depending on what you use. For example, Xero vs QuickBooks. Different software, but same in purpose: Recording your business activities.

When I have a potential client that uses QuickBooks, I look at the banking section to see if their bank has been connected. If it has, then transactions are pulled from the bank account into QuickBooks. Then the bookkeeper needs to categorize them appropriately.

I will look at how many bank and credit card accounts there are. If there are a lot, that just increases the workload. I had a client that had 23 credits cards!

I then look at how many transactions need to be categorized. If it is more than 80-100 per bank or credit card account, then is might mean the books are being neglected. That also depends on how much transactional activity the business does.

For example, if a bank averages 300 transactions in one bank account per month, then seeing 40-50 uncategorized transactions doesn’t look bad to me.

Here is an example of bookkeeping not being done. Thousands of transactions to be categorized!

A typical bookkeeper would want as few transactions pending as possible. This is because if they need to provide financial statements, it will be accurate enough for the owner.

Some times this can’t be helped. Some transactions need more detail provided by the owner. If the owner doesn’t get back to the bookkeeper, the bookkeeper has a bottleneck; the owner.

So, as the owner, if you check your books and see a lot of transactions in uncategorized, reach out. Your bookkeeper owes you an explanation. It could be because you never answer their emails.

Bookkeepers are infamous for being bad communicators, if you don’t address their questions, they may not do anything about it.

Ultimately, you and the bookkeeper are partners. You own and run the business, but the bookkeeper partners with you to take care of them books. They are your books though. This is one area to oversee periodically.

Bank Reconciliations can be messy if not done every month.

  1. Are the Banks and Credit Cards Reconciled?

Reconciliations are so crucial. Most small business owners don’t understand their importance.

If I tell you, I made $10 Million last year. One place to look to validate that are the bank reconciliations.

This means we take the accounting records and the bank financial records and make sure nothing is missing.

Accounting records will differ from the bank, but it’s usually due to timing. For example, I cut a check in May, but it doesn’t get cashed until June. I will see that as a outstanding check in the May reconciliation. However, it won’t reconciled out until June’s reconciliation and that’s okay!

Books should be closed monthly and require a password to open. Otherwise errors can be made in past periods.

  1. Are the Books Being Closed?

I’d say 98% of the books I’ve reviewed are never closed out. Okay, it’s 100%. That’s because professional bookkeepers that do close the books understand why they need to do that. It is critical for tax preparation and keeping accurate financial records.

You close the books to prevent changes from past records. Those changes could be errors or fraud-related. The majority is cause by the former.

Say a check was cut in a past period, but never cashed. An amateur would delete the check. Never delete a record. The error should be corrected with a journal entry. Otherwise, the trail of record is lost.

It also will mess up your bank reconciliations. Now imagine this being done several times. It gets messy fast. The risk of the bookkeeper’s incompetence is lowered if they close the books. Books should be closed on a monthly period.

This is known as month-end close.

If you are getting monthly financial statements from your bookkeeper, then that’s a problem.

  1. Do You Get Monthly Financial Statements?

For some business owners, this might seem like an obvious deliverable. Surprising, a lot of business owners don’t look or ask for monthly financials. If you have a subpar bookkeeper, they won’t bother supply it either.

The reason is because, producing monthly financial statements, requires month-end close and adjustments. If you are paying an inexperienced bookkeeper, they may not know to do these things.

If you are paying on the cheap, they may not want to or worse, be obligated to. After all, cheap could mean lowered of work.

I had a client that was paying a bookkeeper $100/mo. She had 8 different accounts and required monthly adjustments. Turned out, the bookkeeper was not doing the books at all!

On one side, I couldn’t blame the bookkeeper, had they worked even a few hours on month, they wouldn’t be making a lot.

On the other, this bookkeeper should have communicated to the client. They could not reasonably do this kind of bookkeeping at such a low price.

Because it hadn’t been done, the client was unable to file her taxes on time. Luckily, we got it all cleaned up, but it wasn’t cheap. Cheap is always more expense down the road.

If you are not monitoring business financials, you are running in the dark!

  1. Are There Critical Financial Areas Being Monitored?

Lastly, you want to know if you are meeting your goals. What can not be measured, cannot be improved. If your bookkeeper isn’t monitoring key areas then you need to have a talk with them.

This isn’t solely the bookkeeper’s responsibility. They may not be experienced enough to advise you. That is a big difference between bookkeepers and accountants. Accountants pay more attention to the financial statements.

They can determine areas of financial weakness. For example, say you had a record-breaking sales month. Woo-hoo! The accountant might say, “not so fast, your accounts receivable is ballooning.”

“As a result, you’re risk has increased. What are you going to do to make sure these are paid timely?”

If you’re bookkeeper provides that kind of analysis and checking off these other areas listed above…

I’d say they’ve probably got your business covered!

Never hurts to always check.

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