3 minsThe month of February is for celebrating love, our nation’s presidents, and… demystifying bookkeeping? Maybe that last part doesn’t exactly fit into February, but in the spirit of being slightly contrarian, we wanted to share some concepts with our loyal readers that might help demystify bookkeeping. While our posts on working capital management tend to have a more serious tone, we are hoping you’ll enjoy this lighter take on bookkeeping.
Debits and Credits
One of the very first concepts we were taught in the Intro to Financial Accounting course in college was debits vs. credits. Should be a pretty simple concept, right?
Assets are debit accounts, while liabilities and equity are credit accounts. Revenue is a credit account and expenses are debit accounts. Cash comes in = debit. Cash goes out = credit… except when this is actually the opposite of the nomenclature used in everyday life.
You see, when receiving a paycheck through direct deposit into your personal bank account, that’s actually considered a credit on your bank statement. And when you pay a bill, money comes out of your bank account, and that’s a debit on your bank statement. Confused yet?
Luckily, your bookkeepers and accountants should (hopefully) be well versed in the nuances of debits, credits, journal entries, and the like. Trust them to handle the debits and credits masterfully, while allowing you to focus on what matters most for your business, which is to acquire more clients and make more money.
GAAP = Crap? Or Not Crap?
There’s a cynical saying in CFO circles that “GAAP is Crap.” Of course, most accountants do not truly believe that GAAP (Generally Accepted Accounting Principles) is crap. The reason this saying exists in CFO circles is because GAAP doesn’t always reflect the true metrics and KPIs (key performance indicators) within a business that tell someone not just where the organization has been, but where it is going.
GAAP also has a number of rules and principles that don’t always tell the full story to a leader of an organization. Metrics around client retention, recurring revenue, and sales pipeline velocity have nothing to do with GAAP, yet these are critical to understanding the financial health of a firm.
All of the above being said, accounting under GAAP is likely a requirement for most firms that have at least $5 million in top-line revenue, and it’s highly recommended even for smaller companies. As CPAs and CFOs, we must maintain a great appreciation for the esoteric nature of GAAP, while ensuring our business partners also have deeper insights around their business that aren’t evident in traditional financial statements.
The Bots are Taking Over
The number of accounting and bookkeeping technology solutions out in the world can be overwhelming. Off the top of our heads, we can think of the following accounting software products: QuickBooks Online, QuickBooks Enterprise, Xero, Wave Accounting, NetSuite, Sage Intacct, Zoho… the list goes on. And there are ancillary products for billing and payments, such as bill.com, LawPay, and MineralTree. Lastly, there are all sorts of other financial products for budgeting and planning (NetSuite again, Adaptive Insights, Planful, Anaplan), commissions (Xactly, CaptivateIQ), consolidation (Oracle Hyperion, OneStream), and more.
Additionally, the idea of Robotic Process Automation (RPA), or the use of technology to automate accounting and bookkeeping, has exploded in recent years. Companies like BlackLine, SkyStem, and FloQast are doing their best to get in front of CFOs and Controllers to pitch their products that automate and streamline certain processes.
It’s true, the bots are in fact taking over accounting and bookkeeping. Needless to say, law firm leaders shouldn’t have to be subject to this confusing array of choices. Let your bookkeepers and accountants sift through all the noise and provide the best practice recommendations.
In Conclusion
I hope this post was helpful in demystifying some of the concepts in accounting that law firm leaders may not be familiar with. Rest assured, if you partner with a trusted and knowledgeable company for your bookkeeping and accounting needs (bonus points if they can come to the table with CPA- or CFO-level insights), you will be in good hands when it comes to debits vs. credits, GAAP vs. non-GAAP, and the variety of technology tools out in the world.
