Understanding how pre-accounting differs from accounting.
If you’re confused about this term “pre-accounting” you’re not the only one! In the startup space, buzzwords get created on a daily basis. Some get quickly forgotten and some get adopted, and become part of the lexicon!
We all think of the Accounting and Bookkeeping industry, as slow and sturdy, and accurate – at least we should be, as we’re all about numbers. And even a single number incorrect can cause absolute havoc!
So what is this term “pre-accounting” that is suddenly being used by tech startup’s to describe what they do, and what stage they fit in, and which is now being used on a daily basis by accounting software companies, accounting and bookkeeping firms, & business owners to describe these tech companies?
I probably wouldn’t have thought about writing a blog post about pre-accounting as the term is used so often by myself and the team, that i sometimes forget that not everyone knows what it is.
My friend in the Accounting Software Industry
But I just received an email from an old friend, and a long term veteran of the accounting and bookkeeping industry (he developed one of the most well known accounting software packages around today) and in the mail he said the following:
…. pre-accounting …
He used the term as it was the most common word in the english language, and as I re-reach his line over and over again, I wandered “does everyone use this term as often as they use the word bookkeeping and accounting, and does everyone have the same understanding of what pre-accounting means”?
What does Southern Cloud Accounting say about Pre-Accounting?
So I did some research and found that there was a definition given by Southern Cloud Accounting as early as 2017.
There definition went as follows:
The system through which financial data is gathered, coded, aggregated, and normalized so as to enable accounting to occur; accounting processes executed by non-accountants, including expense management, time tracking, etc. … Unlike accounting, which is clearly the job of accountants, preaccounting is nobody’s job.
Do you agree with this definition of pre-accounting?
Here at DOKKA, we think of pre-accounting in the following way:
The work that was previously done manually to get bookkeeping journal entries complete.
In the early days, that meant taking a document and creating a bookkeeping journal entry and entering into a paper bound ledger book.
Nowdays, some bookkeepers still do this, but most use either electronic spreadsheets (such as excel) to record the bookkeeping journal entries, or use accounting software, both desktop or cloud based.
Pre-Accounting is NOT just about OCR or Data Extraction
This is important – it’s NOT just about extracting the data from a document. (which has a number of fancy terms – Data Extraction, or Optical Character Recognition or OCR)
OCR is a part of creating the bookkeeping entry, but an entry can include the following information:
- Invoice Type
- Paid or not Paid
- If paid, which bank account was it paid from
- Invoice Date
- Payment Date
- Reference Number
- Payment Method
- VAT, GST, Exempt etc
- And a LOT more such as classes etc
So the pre-accounting work is NOT just about data extraction. It’s about creating a bookkeeping journal entry to record the transaction.
Pre-Accounting can include Smart Document Management Systems
And it can go further. It can include a way of keeping track of the source document itself, either by attaching it to the entry in the accounting software, or filing it electronically, or in a platform like DOKKA, adding it to a Smart Document Management System.
Of course, many times when you’re creating the bookkeeping journal entry, you’ll realise that something on the document is wrong, or needs clarification, and that you need to speak to someone in the business, or perhaps one of your bookkeeping colleagues.
This correspondence backwards and forwards can also be part of the pre-accounting process.
Now this is where it gets really interesting – many bookkeepers today, only partially rely on source documentation, and some don’t rely on any source documentation at all, rather using the bank statements or bank feed to create all the journal entries. Sometimes, the more innovative cloud accounting software packages like Xero and QBO might have bank feeds built into them, but most of the time, a bookkeeping entry would need to be created from each line item of the bank statements or bank feed.
Would bookkeeping journal entry compilation be part of the definition of Pre-Accounting Software?
Some bookkeepers and accountants say “of course”, and others aggressively argue against it.
The point is that pre-accounting is FAR more than just extracting the total and VAT amounts from a document.
Pre-Accounting is all the work done by Accountants and Bookkeepers until the bookkeeping journal entries are in the accounting software, and the source documentation is safely filed (and possibly indexed) so it can easily be retrieved later on.
A summary of the DOKKA definition of Pre-Accounting
To recap our definition of Pre-Accounting:
1. Gathering of the source documentation
2. Creation of the bookkeeping journal entries
3. Entering the bookkeeping journal entry (and possibly a copy of the source documentation) into the accounting recording solution
4. Keeping the document, or a digital version of the document, in a safe place
5. Resolving any issues with the documents with the clients, or fellow bookkeepers
6. Keeping any other documentation related to the Bookkeeping process (such as letters from the bank)
7. Other required documentation such as Bank Statements or Bank Feeds
So pre-accounting is a cumbersome process, which requires a lot of time and effort.
And this is why pre-accounting tools like DOKKA are making Bookkeepers and Accountants so happy. They’re saving them significant time on this manual work, and allowing them to spend more time, making sure they have happy customers.
As our systems become smarter, so the Bookkeepers & Accountants will save more time.
Which is good news for the Bookkeepers, the Accountants, and the Business Owners.