Follow Consistent Accounting Procedures:
Accounting in QuickBooks follows a specific and structured process. As an accrual-based system that complies with GAAP standards, following consistent accounting procedures is imperative. Proper setup of products and services, including standard sales and purchase prices, is essential for calculating COGS when no bill is linked to an invoice. The primary goal of GAAP accounting is to align expenses and bills with the revenue generated from invoices, creating a clear audit trail to connect all transactions seamlessly.
The accounting process is:
Estimate (optional) to PO (optional) to Bill Item or Expense (marked billable, attach receipt) to bank feed (expense) matched to bill, will populate the Unbilled Charges Report adding Inventory (quantity) and COGS (amount) to your financial statements. When invoiced (add bills to the invoice from the suggested transaction pop out drawer). This process Bill + Invoice is critical for correct accounting of Sales, COGS and Inventory, is GAAP Compliant and produces accurate financial statements.
The Importance of Establishing and Following Consistent Accounting Procedures: Fraud Prevention
The rule of COGS calculations:
An invoice (income) + bill attachment (COGS) with markup = gross profit.
An invoice (income) + bill attachment (COGS) and no markup is a reimbursement = zero gross profit.
An invoice with no bill or expense attachment will not calculate COGS (if not stated in your products and services), increasing your stated gross profit-income.
An Invoice with only a receipt attachment may not calculate the true COGS to your income statement (from the receipt) if the price and cost are pulling from the Products and Services and no billable expense is attached.
Use the Item drop down on an invoice for billable Products and Services and the Category drop down for non-billable General Direct Overhead Expenses.
Sales, Inventory and COGS should be reconciled EOM.
The Importance of Establishing and Following Consistent Accounting Procedures:
1. Accuracy and Reliability
Consistent accounting procedures help ensure accurate financial reporting, leading to reliable financial statements.
2. Compliance with Legal and Regulatory Requirements
Following consistent procedures ensures compliance with tax laws and accounting regulations. Notably, failure to follow these processes may result in incorrect income reporting, which can lead to tax discrepancies and legal liability.
3. Efficient Financial Management
Following a correct workflow enhances tracking of business expenses and sales while ensuring accurate cost allocation and streamlined financial management.
4. Internal Controls and Fraud Prevention
Utilizing correct software documentation (Estimate, Purchase Order, Bill, Invoicing and Bank Feed Transaction Matching) is a built-in control to help prevent fraud and mismanagement, preventing manipulation of financial data, such as gross profit.
5. Time and Cost Efficiency
Following a process minimizes errors and reduces the time spent correcting transactions.
6. Financial Transparency and Communication
Consistency in your accounting procedures leads to greater transparency in your financial reporting and provides a complete audit trail for every transaction. This transparency is vital for stakeholders such as investors, auditors, and tax authorities.
7. Scalability and Growth
As your business grows, so will the complexity of your accounting. Consistency allows businesses to scale efficiently.
8. Better Financial Decision-Making
Consistent accounting procedures provide the accurate, real-time data necessary for informed decision-making whether it’s for making investment decisions, adjusting pricing, or managing cash flow.
9. Audit Readiness
By adhering to a consistent process, you will always have proper documentation of COGS and inventory while reducing audit complications, ensuring smoother, quicker audits.
10. Building Trust with Stakeholders
By following consistent accounting procedures, you build trust with your stakeholders—whether they’re investors, lenders, or clients. When transactions are properly tracked, gross profit and other key metrics are accurately reported, strengthening your credibility. Furthermore, a well-structured accounting process demonstrates professionalism and reliability, which can positively influence relationships with partners, customers, and financial institutions.
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