Are you thinking about changing your accounting system? Most firms that do this choose to change as of January 1, or the beginning of the fiscal year for the firm. While this is the simplest, with planning, it can be done at any time.
The first step is to decide what to switch to. Sometimes the decision is easy, you are switching practice management or billing software and want to use the integrated accounting. Other times it’s less obvious. Always start with understanding what pain points you are trying to resolve and what features you are looking for.
Once a solution is chosen, you need to decide how you are going to convert. If the software you are going to can import data from your old system this may seem like the obvious choice. But beware, if there’s lot of “junk” in your current system or you want to completely change your chart of accounts, this is the time to clean up. The migration is a good time to clean up your vendor and customer list. You should reconcile all your accounts and clean up old uncleared checks prior to migration. Work with your accountant on the best way to handle these transactions.
If you don’t want to, or can’t, import history and transactions then you should use journal entries to enter your beginning balances. If using journal entries you can do one entry as of the start date or, an entry as of the beginning of the year and adjusting entries by period to give monthly or periodic reporting. If you want to be able to run comparison reports with prior years you can enter year end balances for various periods, usually year end, to give the information.
What should your journal entry look like? You start with the trial balance as of the start up date, but then there are adjustments to be made. I recommend creating an opening balance clearing account, to make it easier to get the balances in correctly. What adjustments are needed?
- Operating Bank Accounts – Always enter the balance from the bank statement as of the cutover date, rather then the balance from the trial balance (book balance). The adjustment will go to the clearing account. Then enter the uncleared checks and deposits and offset them against the clearing account. This will make it easier to reconcile the bank account as prior transactions come through.
- Trust/IOLTA Bank Accounts – Enter the balance my client to match the bank statement balance. Then enter the uncleared transactions. All IOLTA transactions should debit the IOLTA Bank Account and credit the IOLTA Liability account.
- Accounts Receivable – If your accounting system is on an accrual basis, or if your billing and accounting are in the same system, then you will want Accounts Receivable entered by client with whatever level of detail is needed to properly allocate the income when received. Remember that if accrual based the income will have already been accounted for in your trial balance so you should either use the clearing account, or adjust the income accounts in the beginning balance.
- Accounts Payable – If your accounting system in on an accrual basis you will want to record Accounts Payable by vendor with appropriate detail. Similarly to Accounts Receivable, remember that expenses may already be reflected in the trial balance.
If everything is entered correctly, the clearing account will be $0 and the trial balance will match your prior system. At the end of the year you will have the balance for the year, but may have to go back to your old system for details on transactions and preparing 1099s.
Changing systems is never “simple”, but with the right steps, it doesn’t have to be scary. Of course, we are here to help in the process.