What is accounting? An in-depth look
Accounting is a financial practice that involves recording, classifying, and summarising the financial data of a business.
We can also refer to it as a higher-level process that uses the financial data gathered by bookkeepers or business owners and then produces financial models.
It helps to track the inflows and outflows of money, helping businesses make informed decisions about their finances. Accounting is more subjective than what you do in bookkeeping, which is mainly transactional.
Some of the aspects of accounting include:
- Preparing the adjusting entries
- Helping the business owner understand the impact of different financial decisions
- Handling income tax returns
- Analysing operation costs
- Reviewing the company's financial statements
One of the essential parts of the accounting process is to analyse the financial reports, which help you make a business decision.
This results in a better understanding of your business's profitability and provides you with information about the business's cash flow.
Accounting will turn the information located on the general ledger into insights that provide the "bigger picture" of the business and what path your company is progressing down.
Business owners often work with accountants to help with tax filing, forecasting, analysing the business's financial position, and strategic tax planning.
Accountant Credentials
To be an accountant, you must have a bachelor's degree in accounting (in most cases).
That said, a finance degree may be a suitable alternative if you don't have a degree in accounting. Accountants can also acquire other professional certifications, unlike bookkeepers.
For example, with adequate experience and proper education, accountants can work to become a CPA or Certified Public Accountant title.
To earn the CPA title, the accountant must pass the Uniform Certified Public Accountant exam and have experience working as a professional accountant.
The importance of accounting for your business
Accounting plays a huge role in running your business. It helps track expenditures and income, make sure you are compliant, and provide the government, management, and investors with quantitative financial information that is then used to help guide business decisions.
Some of the top reasons it is imperative to invest in accounting for your business include:
1. Help evaluate business performance
Your business's financial records reflect your business's operating results and financial position. Therefore, they help you understand the financial state of your business.
Having clean, accurate, and updated records will help you keep track of gross margin, expenses, and debt. Still, it allows you to compare your existing data with prior periods to properly allocate your budget.
2. Ensures statutory compliance
Regulations and laws vary from state to state, but with proper accounting processes and systems, you can feel confident your business will maintain statutory compliance.
Accounting ensures liabilities like pension funds, income tax, VAT, and sales tax (to name a few), are handled as needed.
3. Create a budget for future projections
Future projections and budgeting can make or break your business. Your financial records will play a huge role when it comes to this.
Business projections and trends are based on your historical financial data. They are needed to help ensure your business remains profitable.
The financial data is most reliable and accurate when provided with a robust and structured accounting process.
4. Helps with filing financial statements
Businesses must file their financial statements as required by law. And, the listed entities must file them with the stock exchanges for indirect and direct tax filing purposes. It should be clear that your accounting practices play a huge role in these situations.
The cost of hiring an accountant
Some accountants will charge by the hour, and others will work on a retainer fee paid monthly.
As a result, the service cost can vary quite a bit from one accountant to another. It all depends on the level and type of service the accountant provides.
Be sure to discuss costs at your initial meeting. This will give you an idea of how often you will meet with the accountant, which will also impact the cost.
When to hire a bookkeeper or accountant
It can be challenging to figure out when to hire a bookkeeper or accounting professional. You may even wonder if you need one at all.
While some small businesses only use accountants as consultants, you have more than a few options regarding handling different bookkeeping tasks.
For example, you may want to handle bookkeeping tasks in-house. You can discuss what software to use with your accountant and provide them with the necessary information.
Be sure to consider what makes the most sense for your business's needs. Hiring these professionals means you will have time to focus on core operations rather than bookkeeping and accounting tasks.