Cloud accounting is a great tool which can do a lot of the heavy lifting and make your
accounts more accessible and usable. However, like any tool, you need to use it
correctly, because people can get themselves in a pickle.
The software is very flexible and user-friendly, but this can be a double-edged sword.
There are many different types of businesses - some using cash, others invoices and
then there are various VAT schemes. All can be accommodated but it’s important to
use cloud accounting in the right way for you and your business, so you get the
result you want.
How Cloud Accounting Systems Work
Most cloud accounting systems have three main sections, and we’ll look at each of these in turn.
1. Customers/Sales Ledger
This is a list of your customers. It allows you to issue invoices, mark off the payments to them and shows who owes you what. As an example of how it works, if you issue an invoice it clocks it up as a sale and also shows that the recipient owes you money.
2. Suppliers/Purchase Ledger
This is your list of suppliers, which is similar, but shows your outgoings. You can include the bills you receive and mark payments against them.
3. The Bank
This keeps track of the cash you’ve got. It’s handy because you can set up a link with your bank accounts to bring the transactions into your software.
Where Cloud Accounting goes Wrong
Where things go wrong for people is with the interface between each of the three
parts. If you’ve got a bank feed set up, the key rule is (unless you really know what
you’re doing) that the only transactions that should go in are those from the bank
feed.
However, sometimes people do this unknowingly. Normally, this is when a
customer’s invoice is marked as paid from the customer’s list BUT the corresponding
payment is marked against the bank.
This effectively enters an extra transaction into the bank account, on top of what
comes in through the bank feed.
So, normally it's best to mark invoices as paid via the bank.
There are occasions that you may want to manually put in a payment if you get a
cash payment, as you don’t have a bank feed for that. Likewise, if you receive a
cheque you might add that as ‘an undeposited fund’ – you don’t want to be chasing a
customer for payment just because you couldn’t be bothered to go to the bank to
deposit it! There can also be added complexity if you receive payments from Stripe and
similar systems.
Just make sure you don’t mark it as paid from the bank!
Why People get Caught out with ‘Matching’
When you’re going through your bank feeds and explaining transactions, there are
two options available to you:
1. Mark the transaction as an expense or income item
2. Match it against an invoice or bill
This is where you need to be careful, because some systems will suggest what you
should match it against. While this can save you time, the software might not pick the right one.
This is especially the case if you issue invoices for the same amount to lots of customers. Sometimes the amount on the invoice and that received might not be the same - for instance where a customer pays two invoices in one go - things won’t tally. Or, you may have transactions in foreign currencies. The system will deal with it, so long as you apply a bit of thought, rather than just relying on the automation.
Beware of Doubling Up
Don’t forget: if there IS something to match up, make sure you do it! If you get a bill
come through and you pay it but you don’t match it in the bank, when you put that bill
through the system it will mark it as an expense. If you then mark it as a payment it
will double up the expense.
If you’re using other systems to get your invoices in, watch out for timing. If you sort
out your bank before you’ve put the invoice on, you won’t have anything to match
against. When the invoice is added to the system, it will appear again and double up.
Cloud accounting is brilliant and there are loads of different reports available, but it’s
worth taking the time to work out what they mean. You don’t have to look at all of
them, but pick those that will help you and make sure you understand them.
As with any tool, it’s a matter of learning to use it.
What are your experiences with cloud accounting? Love it or loathe it, if you've got any questions just comment below.
