 0. Accounting software 2023. How do bank feeds fit into my accounting system? Get ready to become an accountant here with 0 2023. Here we are first a word from our sponsor. Well actually these are just items that we picked from the YouTube shopping affiliate program but that's actually good for you because these aren't things that we're just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and use ourselves. Bayer Dynamic? Not sure if I said that right but this is the DT770 Pro 250 OHM studio reference closed back headphones. I wear headphones basically every day for a large part of the day. They are important to me therefore I've gone through many different kinds of headphones. I've had these for some time and they've worked quite well. They fit over my ears but I'm still able to put my glasses on under the headphones. The headphones not pinching too tight on the glasses to give me a headache which is nice. The quality of the patting is good and it has lasted for some time. I've had these for some time now and they haven't gotten all torn up on me or anything like that. I also like that I have a cord when I'm doing my recordings as opposed to a USB centered headphone because that frees up a USB port and I find the USB headphones to be less reliable. They come with an audio jack that looks like this which is useful for me because that plugs into my audio interface. However if you want to use the headphones for some other purpose I believe it's fairly easy to get a converter to other types of audio jacks. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accounting instruction.thinkific.com where we have many different courses you can purchase one at a time or have a subscription model given you access to all the courses. Courses which are well organized have other resources like Excel files and PDF files to download and no commercials. In our custom zero home page going into the company file we set up in a prior presentation that being the bank feed file. Now note that usually when people think about setting up their accounting system within zero because zero has that great feature of being able to connect to the bank they imagine that they're just going to set up the company file connect to the bank all the banking information is going to flow in from the bank to zero and automatically create those financial statements the balance sheet and the income statement which you can then use for whatever purpose you need including internal decision making possibly tax preparation help if you're in the United States and external reporting purposes for example. However it's not generally that easy so the bank feeds are a great feature they make things more simplified they make a lot of steps automated that would otherwise be manual data input but it's not as easy as basically just connecting to the bank pulling the information in from the bank and then just allowing that to be creating your financial statements. Now how much of your financial statement creation can be automated from the bank feeds will be dependent upon the type of business that you are in. So before you connect to the bank you really want to think about what kind of accounting system do I have and how do the bank feeds fit into that accounting system and as a general rule the closer you are to a pure cash based type system the easier it will be to automate your whole accounting process with the bank feeds. However a lot of times you're going to be forced to do some accrual type of things so the approach that we will take then in this as we do our bank feeds is we're going to say I'm going to start off with the assumption that we're going to try to automate everything so that we can use the bank feeds in order to create our financial statements as much as possible that still requires a lot of work to set up but once set up then it could basically be automated and then we'll take a step away from that and look at the main factors that pull us away from a cash based system to an accrual based system which add more complexity. It doesn't mean the bank feeds aren't useful in an accrual system but they might act differently and we'll take a look at why that might be the case. So before you actually connect to the bank or pull in the actual data from the bank feeds what you usually want to do is first take a look at that chart of accounts which is what we did here right we went to last time we looked at the chart of accounts that was provided to us and as we start to pull in data from the bank feeds note that if you pull the information from the bank feeds it will not yet be creating the financial statements but when you get to the point that you actually want to create the financial statements from the data in the bank feeds then you want to have some idea of what your chart of accounts is basically going to look like so we talked about that last time we are in essence going to build our chart of accounts as we do the bank feeds as we do the data input on the bank fees to have more of a customized type of system. The other thing that you want to consider is is your accounting system new are you building an accounting system from scratch is the bank account that you're putting in place you're going to pull bank feeds all the way back to when the bank account was zero had no money in it and then you're going to and then you're going because it was a new business account and then you're going to record all the transactions from that time or which is quite often the case you already had some kind of transactions happening in the checking account and possibly some other accounting system in the past if that's the case then you're going to have to think about when you pull the information in from the bank feeds what's the cutoff date that you want to start pulling the information in from the bank feed so that you don't have duplicate information in your accounting system and so that you're pulling in all the information as far back as as you need to go so oftentimes you might try to think about what was my prior accounting system and how can I automate the current system if you're moving from one accounting system to another then it's used it's often useful to have an entire year in the current accounting system so you might say if I'm moving from a prior accounting system to the current accounting system do I want to pull all the data from the prior accounting system into the current accounting system or just enter say the beginning balances as of the end of the prior accounting year and then enter the current accounting data as of say January of the current year right so those are some options that basically you want to think about how you're going to be pulling the data in to the current accounting system okay I'm going to jump on over to a flow chart to think about this concept of a cash and a cruel system now note this flow chart is actually from a QuickBooks desktop home page but I'm just looking at the flow of the forms which are basically the same for any kind of accounting system to think about where would the bankfeeds fit in to any kind of flow assumption so we have three kind of cycles that we can think about the vendor cycle is when the money is going to be coming out of the business at the end of the cycle as we purchase goods and services that are going to help us to generate revenue we have the customer cycle or the revenue cycle the sales cycle where we would expect at the end of the cycle the cash to be going up and it's the other side is going to be revenue that we are generating for goods and services that we are providing and then we have the employee cycle which is kind of similar to the vendor cycle but adds a lot more complexity due to laws and regulations around employees where money is going to be going out for goods and services that we are purchasing now note you can look at each of these cycles kind of independently and analyze whether or not they are more or less on a cash based type system in other words when we say something's on a cash based system a lot of times people think well that means the whole system is cash based or a cruel based but really you can you could break it out by cycle I could have a vendor cycle which is on a cash based system but a sales cycle which is more on an accrual based system why would I do that because that just happens to be the industry that I'm in requires me to do more accrual type transactions on the customer side like track accounts receivable for example whereas on the expense side I could just pay things when they become due and I'm more on a cashed type of basis so it will really depend on the industry that you're in so let's go through each of these cycles think about the easiest system and how the bank feeds would fit into it and then we'll add the complexities those types of things that will cause more problems when you when you start to add the bank feeds so if I look at the vendor cycle money's going out for goods and services that we're purchasing at the end of the cycle now the easiest way that can happen and the best the easiest way to just build your financial statements from the bank feeds is if basically we're just writing a check or an electronic transfer in other words everything that becomes due your utility bill your your your phone bill you know all the supplies and stuff that you're purchasing you are basically purchasing them with electronic transfers and if you're purchasing them with electronic transfers then uh then those things will clear through the bank and we can we could possibly wait till they clear the bank and then record the expenses at the point in time they clear the bank with the use of the bank feeds that would be the easiest thing to do notice that that's not a full service accounting system because in that case we're what we're actually doing is relying on the bank in order to record our transactions and what traditionally we have done in the past is we record the transaction and then we verify it with the bank but in certain instances just because of the ease of relying on something clearing the bank and because things are becoming more trustworthy transactions over time so it's it's kind of easier if you're in this situation to simply wait till it clears the bank use the bank to record it right so instead of if i'm going to pay for something electronically instead of me going into the zero system and saying i'm recording a $50 bill for utilities and then waiting till it clears the bank and using the bank feeds to basically verify which would be a reconciling type of system i'm just going to say i made an electronic transfer it's going to clear the bank and i don't even record it in zero until it clears the bank and then i record it with the bank feeds now note that that's different than what we used to do traditionally because we used to traditionally have to write checks if you're still writing checks for things you can't really do that even if you're on a cash based system right you're writing a check for the utility bill then you can't like wait till the check clears the bank to record the transaction because in that case when you write the check there's going to be a big lag a big difference between when the check clears and and when you wrote the check and that's an important that's what you're trying to do when you write checks you're trying to figure out those times when the check got lost in the mail or something like that so so if you're writing a check then you you really want to actually write the check enter it into the zero accounting system and then when it clears the bank you will see the clear check on the bank feeds but you're just going to match the the bank feed to the check that you wrote that's a full service accounting system because now the bank is a verification tool and it's not the thing that we're using to actually build the financial statements however because the electronic transfers are so much more reliable these days and the turnaround time is so short it's like one to three days we can basically say i'm just going to the easy thing to do is just to say i'm going to do electronic transfers wait till it clears the bank and then record the the vendor when it clears the bank so that's what many businesses will do especially small businesses however if you get if you add an accrual component in it meaning you enter a bill first and then you're going to write a write a check or make a payment for the bill now you've now you've entered an accrual kind of component to it so when you enter a bill and let me just point out that bills by the way for zero is a specific data input form term because you can use bills even in accounting to kind of talk about either side of the table you can say i am billing my client something but when you bill the client you don't enter a bill into the system you enter an invoice but to them it's a bill the invoice to us is a bill to them and if i receive a bill if i receive the utility bill for example i could just pay the bill with an electronic payment or a check type form i may not enter the bill into zero if i enter the bill into zero i'm specifically saying that i'm increasing the accounts payable account i'm doing an accrual thing i'm not going to pay it now i'm going to pay it later but i'm going to record the bill when i have received the bill so this often becomes more important for larger companies and for companies that are really tight on their cash flow and they're trying to really manage their their cash flow it's important for larger companies because the what what they're going to do from a cash management strategy is try to pay the bill as late as possible uh and and that's the goal now if i pay a bill as late as possible and it was like a hundred dollar bill and i paid it 15 days later than i than i did than i could have right uh that 15 days is irrelevant really to me but if i had thousands of transactions and the dollar amounts were thousands of dollars then 15 days becomes important becomes a lot more important to really try to pay your bills kind of as late as possible when you have a high volume of transactions and higher dollar amounts of transactions and of course if you're if you're really trying to budget your money then you might put them in as a bill and really try to sort them and then pay the bill the problem with that is the bill form doesn't have any cash related to it so when you enter the bill you got to think about when you pay the bill how are you going to connect the bank feeds into it usually you're going to enter the bill then you'll pay the bill and the bank feed will then be used not to actually record a transaction but rather to record uh or verify that you paid the bill meaning it's part of the bank reconciliation process uh the other thing that complicates the vendor side is inventory because inventory is often paid with a bill and inventory is something that you're going to have to track as an asset so in other words when you pay for something on a cash-based system usually you just expense it so if i if but with inventory normally we track it on a cash-based system so i'll talk about inventory a little bit more in a second but let's go on to the to the revenue cycle side of things now in the revenue cycle uh you might be in an industry the easiest industry to be in to automate your transactions with bank feeds is like gig work right like you're getting paid by youtube you're getting paid by some kind of platform you do work and they just send money to you and it hits your account at some point in time right when it actually hits your checking account then the easiest thing to do is is record that deposit with the bank feeds as revenue so you're using in essence a deposit form to record the revenue that's coming from these platforms now it could be a little bit more complicated than that because you might use an intermediary thing like a stripe or something like that and you have to decide how do you want to group your transactions do you want to wait till it hits your bank account and then just record the revenue when it hits your bank account or do you do you want to try to break out the transactions that are happening from say your your sales platform like like a like a Shopify or something like that do you want you can there's easier and less easy methods the easiest thing to do is just wait till it hits your checking account with the bank feeds and just simply record it as revenue at that point in time so but then you might have some businesses when you can't really do that you're still on a cash based system but maybe you have a cash register if you're at a cash register a restaurant a food truck or something like that then you're still getting paid at the same point in time but you can't really wait till you till the money clears the bank to record it right because you're going to record the transactions basically as you're making the transactions and if you wait until it cleared the bank when you deposit the transactions in the bank from a cash register they're all going to be a lump sum transaction that got deposited into the bank so usually for internal control purposes what you're going to have to do is record the transactions at the cash register receive the cash or the credit card or whatever payments that you are receiving and then when we record them we'll have to put them into like a clearing account we're not going to put them directly into the checking account because because when the deposits actually physically go into the checking account either from us as we physically deposit the cash into the checking account or from the intermediaries like the credit card companies that make a deposit of the transactions into the checking account they're going to group multiple sales transactions together so if i made a hundred five dollar sales it's not going to be deposited into my checking account as a hundred five dollar amounts it's going to be a lump sum of some kind and therefore we're going to need some method to be able to group the information in our system in the same way as it will be deposited into the checking account to make the bank reconciliation easy as long as we have that grouping correct we can use the bank feeds to basically help us out with the bank reconciliation but we're typically not going to use the bank feeds to record the transaction in that case and then if we have if we have invoices like if you're a law firm a cpa firm or you do landscaping and that kind of stuff then you have to do the work first you may have an estimate and then you do the work typically and then you've received the money so now you have an added problem this is an accrual type of thing because the invoice and by the way the invoice in accounting software terminology means that that's what we're billing the client right so so but we can also bill the client with like a money out form or sales form and you could use the invoice like like to say that i received an invoice like the utility bill the utility company invoiced me so you could use it that way as well in normal language but for accounting software invoice means that you're going to bill the client and it means that a counter receivable is going to go up counter receivable is going to go up the other side is going to be revenue no cash is affected so you can't record an invoice with the bank feeds because there's no cash that is involved with this transaction now the invoice is a little bit tricky because you could say well i can enter the invoice and i can wait until they pay us and when the payment clears the bank maybe i can use the bank feeds to connect to the invoice to record the deposit so you might be able to still kind of do it that way it kind of depends on the system but oftentimes if you invoice then you're going to receive the payment and then you're going to record uh record the deposit so we'll talk about different variations on where the bank feeds can fit in there you can imagine in theory a system where you have an invoice and then you wait till the bank feeds clear the bank and the bank feeds record the received payment and the deposit or you can imagine you have an invoice you record the received payment possibly to a clearing account and then you have a trend a bank feeds that will move it from from the clearing account to deposit uh or you can you can do the whole system yourself manually and then use the bank feeds as a double check which is a bank reconciliation tool now the other thing of course again is the the inventory so if you have inventory in the system when you buy the inventory you're going to have to put it on the books as an asset generally and because you're going to have to put it on the books as an asset that's going to kind of uh make the tracking of the sailing of inventory a little bit more complex so if you're dealing with inventory when we sell inventory with an invoice or like a sales receipt form like at a cash register situation generally if you're on a perpetual inventory system you would record the sale which would be an increase in accounts receivable possibly or cash the other side going to sales and you would also have to decrease the inventory account and record the related cost of goods sold so if if you so if you're recording that full transaction tracking inventory in zero that's going to complicate your bank feed situation as well because you're probably going to have to use the bank feeds more as a matching kind of system so we'll talk a little bit about inventory now there's different ways you can deal with inventory you might if you had inventory try to stay in a cash based system because you might not hold on to a lot of inventory you might be buying inventory specifically for a particular job using it for that job and therefore when you buy the inventory maybe you just expense it at the point in time you purchase it to cost a good sold and then and then when you make the sales you record the sales to revenue when that happens and then you might be able to do the bank feeds uh still or you might have a periodic inventory system in which you track the inventory not within zero but outside on a spreadsheet or something like that and then you make periodic adjustments to the inventory from your spreadsheet to the to the zero system and that way you don't have to record a decrease to cost of goods i mean a decrease the inventory and cost of goods sold at the sales line and so that could make your bank feed a little bit easier we'll talk about that more in future presentations and then the employee e-cycle or payroll now with payroll if you're running the payroll within the zero system using gusto then that's going to cause a cruel components and i'm speaking primarily from a united states payroll perspective here but i believe it will be similar for many different locations because you're going to have other rules and regulations with regards to employees and payroll and some of those often include withholdings of some kind so the fact that when i pay employees i have to withhold money from them means that i have to have a liability account involved in that system for payroll liabilities that's an accrual thing to do and so i can't just wait i can't just pay my employees wait till it clears the bank and say look i paid sam my employee and then just record it at the point of time it clears the bank because you're going to have to deal with all the other kind of things that you have to deal with while processing payroll which includes you know given the paycheck stubs dealing with the withholdings doing the tax report in nine nine forty one's quarterly the nine forty at the end of the year and the w two's and the w three's and that kind of stuff now however if you do payroll outside of zero you have a third party payroll provider doing all of that stuff and you're just trying to make your financial statements correct you might be able to more automate your system you might be able to say hey look i'm just going to wait till it clears the bank even though it's the net check that clears the bank not the gross pay and just record it as payroll expense when it clears the bank that would put you on a cashed based system it wouldn't be completely right your financial statements that is on an accrual basis but you might be able to do period and adjustments possibly at the end of the year simply adjusting your financial statements to be correct on an accrual system by taking the reports from your payroll provider and the tax forms possibly the nine forties nine forty one's the w twos the w threes and and making a period in adjustment so that's one way there's kind of different methods that you might be able to as a bookkeeper say what i want to do this could be the objective of some bookkeepers what i want to do is try to automate as much as i can within the accounting system and work with other people such as cpa firms and payroll providers to to do their jobs properly and that in in that way you might be able to come up with a quite efficient type of system and and and be able to do a full service like an accounting system without while still being able to do a lot of cash based stuff within zero and relying more on the bank feeds because you're going to shore up the differences with some of those things that mess up the bank feeds like payroll and like uh like uh uh the well mainly payroll and possibly some of these other there's other things that we can take a look at when we get to inventory and accrual kind of concepts that we'll talk about and so also also when you're if you're a bookkeeper that works for multiple different clients you really want to see what what your major what's your target market are you a type of bookkeeper that's going to do a lot more full service stuff other than you know basically the bank feeds and pulling this information in from the bank feeds or are you a bookkeeper that's really trying to maximize your your time by trying to automate everything if you're trying to automate everything then you want to think about what kind of clients fit into that accounting system best right what kind of clients could I pull in and basically automate the whole system with the bank feeds and where am I going to run into problems where you're going to run into problems typically inventory if they want to track that on a perpetual inventory system it's going to be more difficult specialized area oftentimes with the inventory uh that you have to deal with if they have to invoice then that's going to add a bit a level of complexity that you may or may not be able to take kind of deal with and then of course the payroll which you might be able to work around if you can work with payroll providers and have an external payroll provider and still basically do a lot of the stuff within zero on an automated basis