When an accountant tells you ‘I will do your accounts,’ what does that actually mean?
Basically, in terms of a small business, what most accountants do is Book-Keeping, Bank Reconciliation and Reporting.
Book-Keeping
Book-Keeping is the process of recording financial transactions using double-entry accounting system, under which, every entry to an account requires a corresponding and opposite entry to a different account (debit and credit).
This system has an error detection characteristic. The sum of debits and credits must be equal in value; otherwise something is wrong.
Book-Keeping is usually done on a daily basis. You may have a daybook recording daily purchase, sales, receipts and payments. It brings ‘raw documents’ into the accounting system called ‘Trial Balance.’
Bank Reconciliation
Bank reconciliation is a process that explains and adjusts the difference between the bank balance and accounting records. Differences may occur, for example, from a cheque issued by the company, which has not been deposited to the bank.
In the accounting book, there would be money going out, but in a bank statement, there would be no money going out.
Reporting
After Book-Keeping and Bank Reconciliation, an accountant can use the information from Trial Balance to finalise the Profit and Loss Report and the Balance Sheet report.
It is called the Reporting Process.
From these two reports, you can get an idea of the financial situation of your business.
Good accounting benefits
Good accounting is vital to any business, the first and foremost of which is tax compliance. The tax return is filed based on the accounting records a business has maintained. A good accounting system ensures that the figure is correct and precise.
You do not have to do extra work on tax return, because the figures already exist as the natural outcome of a good accounting system.
The other merit is that supporting documents would be available for audit.
One of my current clients is under Inland Revenue Department (IRD) audit this year and is obliged to provide financial data for the years 2009 to 2013.
As he used to do his accounts and fill in the tax return forms himself, he could not even provide a basic set of reports demanded by the tax officer.
Business monitor
Apart from tax, accounting information is important for business decision making. It acts as a monitor for business. You can know how your business performs, identify the problems and make improvements by reading a well-organised accounting report.
Good accounting information also helps in strategic planning for a business.
Strategic planning is not just for nation-wide enterprises but also relevant to small businesses.
Take a lawn-mowing business for example. If the owner of this business considers hiring new staff, he can examine his cash flow and decide if the salary payable would erode his cash flow, impacting on his ability to meet other costs.
It is the simplest example of strategic planning, but, is based on accounting information.
Saurav Wadhwa is a Charted Accountant and Principal of IBBZ Accounting Limited based in East Auckland. Phone 027-5555458; Email: Saurav@ibbz.co.nz
