How to structure your books of accounts in any accounting software?

by Biplob Dev ERP Consultant

Mid-Sized Organizations often understaff their Accounts and HR departments assuming them to be cost centers and therefore try to keeps costs at a bare minimum.

This is one of the grave mistakes committed by them because these are the real assets of your organization i.e. people and finances.

By not spending adequately on a good accounts team, you are exposing yourself to compliance errors, high fines, leakages in your accounts, inaccurate reporting, and most importantly - potentially wrong decision-making based on those reports.

Accounting a lot beyond simple data entry and debits and credits – trouble begins when SMB owners often associate this as the only role of an accountant.

In this article, we shall explore a methodical approach to setting up your books of accounts in the proper manner.

All of these may or may not apply to your organization but you should consider all the points mentioned to ensure you have chosen the right method to set up your books.

There are several accounting software and I have only considered some basic features such as Ledgers, Ledger Groups, Cost Centres, Items and Item Groups – something which will be present in every software.

1. Single location organization or a multi-location:

If you are an organization with multiple locations, you must absolutely certainly choose an online accounting software while I am not a big fan of offline accounting software.

The world is moving to the cloud, but if you only have a single location, you could possibly manage with offline software as well.

Entries should be done at the place where the entry originates. People often make the mistake of sending documents to a central office for entries to be made.

This is inefficient, error-prone, and can lead to inordinate delays in what is essentially a simple data entry process.

2. Single GSTIN or multiple GSTINs:

If you have multiple GSTINs then by all means please ensure you choose an online software that supports multiple GSTIN. People sometimes make the mistake of putting GSTINs in cost centers or creating multiple ledgers of the same expense labeled with different state names.

This is a strict no-no in my mind, it probably requires a significantly higher skill set also for your accountant to be able to manage that many ledgers it is cumbersome and at some point, the accountant will falter!

3. Creating Ledger Groups and Ledgers: Ensure that ledger groups are created where required. Ledger Groups are created to classify and group common ledgers under one head. For eg., you can create a ledger group called “Employee Related Expenses” or “Salary Expenses” and group ledgers like Salary, Bonus, EPF Employer Contribution, Staff Welfare, etc. all under this group.

Similarly for Travelling there can be a group created which can include the different ledgers for Local Conveyance, Hotel Expenses, Flight Expenses, etc. Create ledgers and ledger groups only where you want to track a certain cost.

But if you rarely take flights, then don’t create a separate ledger for Flight Expenses because that one-off expenses can go under a Travelling Expenses Ledger itself. Ledger names should be meaningful and unique there is no point in having multiple ledgers for the same expense type i.e. General Expenses, Miscellaneous Expenses, Sundry Expenses, etc.

4. Vendors and Customer Master:

This is again an area that should be meticulously prepared – capture all the relevant data of the vendor and customer while preparing the master – contact name, number, address, PAN No, GSTIN, Pin Code (for e-invoicing), bank details, etc.

Also if you want to categorize vendors separately – Creditors for Capital Goods, Creditors for Services, etc. then they can be created as sub-ledger groups under Sundry Creditors Ledger Group.

Similarly, for your Debtors, you can create sub-ledger groups location-wise, region-wise, product-wise, etc. Always ensure you enable the bill-wise tracking option so that you can know your customer performance and customer aging. This is very vital information while taking decisions to extend credit or not. Some software also gives the option to put credit limits – you may want to use that feature as well.

5. Branch Accounting: A lot of companies have multiple locations and want to maintain profit and loss balance sheet etc. for each branch – if this is something that applies to you, then make sure you choose a software that provides Branch Accounting – do not create multiple entities and maintain accounts separately. It is chaotic and merging the accounts is nightmarish!! Choose your software diligently so that it caters to these functions.

6. Using of Cost Centres: Cost centers are a very under-utilized and is-utilized feature. Use it if you want to track expenses and income for a certain department, business vertical, or team.

For eg., if you have multiple business verticals such as Logo Design, SEO, and Web Development. Then you must categorize each expense and income into one of these verticals. If there are common expenses such as rent, electricity, management salaries, etc. then ensure that these are bifurcated amongst the different business verticals using certain predefined logic.

To ensure that you get accurate reports, then you MUST ensure that all expenses and incomes have the cost center feature activated. Else only certain expenses will show in the cost center report and the overall profit and loss statement shall not reconcile accurately with the cost center-wise profit and loss statement.

7. Document Management: Some of the newer online accounting software offers the facility to attach documents to accounting entries – so that you are virtually paperless. In my mind, this is a very helpful feature which is immensely useful – make sure you attach all the relevant supporting documents to entries, attach the vendor’s PAN card, the customer’s GST certificate, etc so that you have all documents and records in one place rather than in multiple bulky files which then need to be stored – and when required, they are nowhere to be found. This feature is also handy for government inquiries, approval of vendor invoices, etc.

Wrapping Up:

I have mentioned above some basic things to keep in mind while structuring your books of accounts and RealBooks ensured all these were well addressed while designing cloud accounting software to ensure ease of use for the users.

Feel free to get in touch with me if you need any advice or help in structuring your books to ensure you get the maximum benefit and information from your books of accounts.

You need not be a RealBooks Fan for this feel free to write in, and I shall provide you whatever guidance is required to implementing books for your concern.