From the Beginning, Please
Just what is accounting? It is the process of converting records of business transactions from useless data into valuable management information. Accounting is nothing more than a tool used to get the kind of financial information management needs to make good decisions.
All builders know they need to "use the right tool for the job." Using a generic accounting program or a spreadsheet to do construction accounting is a lot like using a rock to pound nails. It "kinda, sorta, maybe" does the job, but not very well.
A shoebox full of receipts, invoices, checks, and deposit slips does not qualify as accounting information. It is the raw material from which accounting information is created. Just as wood and nails become buildings when intelligent work is added, business paperwork becomes financial information. Accounting provides the necessary feedback every business owner needs.
Several years ago, a contractor called A-Systems to ask for help. He had just finished the paperwork on a job that was budgeted to make $100,000. Instead, he found that he had lost $120,000. He didn’t discover this until long after the job was completed. His biggest concern was not the money he lost, but the fact that he didn’t know what caused it. He worried that it could happen again unless he could get a handle on his job costs. He started doing job cost accounting using A-Systems’ software and he began to operate profitably. Now, his biggest worry is how many jobs he can handle simultaneously. That’s a nice problem to have! Simply stated, when he started using the real job cost accounting he needed, he began to succeed.
A Bookkeeper is the person who keeps the "books." Many years ago, I visited a bookkeeper that literally kept BOOKS. This frail old man had to be in his eighties, certainly born in the 1800’s. I went to his office (which smelled like a mixture of mold and BENGAY) to pick up a financial statement for one of his clients. He handed me a pile of books and told me to compile it myself.
There were books or "Journals" for Sales, Accounts Payable, Accounts Receivable and a General Ledger. I calculated the total Sales from the "Sales Journal" and posted (or entered) that amount in the General Ledger. I calculated amounts for Accounts Payable, Receivable, and the rest, then posted those amounts in the General Ledger. When this was finished, I "closed the books."
After calculating the expenses, I had the financial statement I needed for the credit report on the business. The reality was that Dun & Bradstreet had a financial statement on the business, but the owner of the business did not. In fact, he had not seen a financial statement on his business for years. He was running the business by the seat of his pants, relying on business "instincts." As we teach in The 90-Minute MBA Seminar, this method of operation severely limits the growth potential of a business and leads to failure in far too many cases. To avoid this limitation and reduce the risk of failure, we need to do accounting. We need to keep it current and refer to it regularly.