Can two sets of books be better than one?

3 Feb

All organizations, from start-up nonprofits to the biggest corporations, need to maintain a “set of books” for recording their financial transactions.  If one set of books is necessary, can multiple sets be better?*

I present here three true stories of nonprofits with two or more sets of books.  These organizations contacted our firm because they were unable to generate timely monthly financial reports and had difficulties preparing for their year-end audits.

In the first organization a staff member was given the responsibility to pay the bills and another staff member the responsibility to record deposits.  These two people got together and decided the best thing to do was to set up two separate files in their accounting software; one company file for bill paying and one company file for deposits.  Both staff members busily went about their work entering their accounting transactions in their separate files.  Lo and behold, not only were they unable to generate a financial report for the organization, they could not even tell how much cash they had in the bank.

Another organization delegated bookkeeping responsibilities for certain programs to several board members, one board member per program.  Each board member had a copy of QuickBooks installed on a computer at their homes where they recorded the receipts and disbursements for their particular program.  When we first met with these very nice people, they told us that they could not generate an organization-wide financial report from QuickBooks.  They thought they might need new software.

In a third example, the executive director was accustomed to maintaining financial records using Quicken.  When the auditors recommended that they switch to a more appropriate accounting package, the organization bought QuickBooks.  The executive director, comfortable with how to find information in Quicken, did not want to discontinue its use.  What was the ED’s solution?  Maintain two sets of books.  Most of the day-to-day transactions continued to be recorded in Quicken, but then the organization had one of their employees rekey all the data each month into QuickBooks.   Month-end journal entries, accruals, and payroll were posted directly to the QuickBooks version.  In neither place was there a complete record of all transactions.

All three organizations were puzzled as to why, if they were using computerized accounting software, they could not just “press a button” and generate month-end financials.  The answer by now is obvious: multiple sets of books made this impossible.  Why did they create multiple sets in the first place?  Because non-accountants were doing the accounting.

Moral of the story: having multiple sets of books is somewhat similar to three people driving a car where one person’s job is to steer the car straight, a second person is in charge of right turns, and a third handles the left turns.  Except in some special situations (see the asterisked comment below), keeping multiple sets of books is not recommended.  More generally, using non-accountants to do your accounting does not typically result in the best outcomes for your organization if your goal is to have timely accurate financial reports.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

* Referring to accounting data as residing in a “set of books” originated in the pre-computer days when organizations maintained their accounting records in an actual set of physical bound paper based ledgers, journals, and registers.  Computerized accounting software programs (for example QuickBooks) have replaced all of this paper, but the terminology remains (at least for now).  For-profit enterprises are sometimes said to keep two sets of books: one for their regular financial reporting, and one for tax purposes.  There are other legal reasons why a for-profit entity might maintain additional sets of books.  Nonprofits might also want to use more than one set of books if, for example, they have more than one legal entity.  Each entity may require its own set.

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