When an accountant tells you ‘I will do your accounts.’ what does that actually mean? To answer this question, I need to start from explaining what an accountant is doing. Basically, in terms of a small business, what an accountant does is book keeping, bank reconciliation and reporting.

Bookkeeping

Book keeping is the process of recording financial transactions using double-entry accounting system. Double-entry system was introduced hundreds of years ago by some clever people.  Under this system, every entry to an account requires a corresponding and opposite entry to a different account (debit and credit accounts). This system has an error detection characteristic. The sum of debit and the sum of the credits must be equal in value, otherwise something is wrong.

Bookkeeping is usually done on a daily basis. You may have a daybook recording daily purchase, sales, receipts or payments. Bookkeeping brings those ‘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, if a cheque issued by the company has not been deposited to the bank. In the accounting book, the money has gone out, but in the bank statement, the money is still there.

Reporting

After bookkeeping and bank reconciliation, the accountant can use the information from the 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 have an understanding of your businesses financial situation.

Good accounting benefits: easy tax compliance

Now that you know what an accountant is doing, it will be easier to understand why a good accounting system is vital to a business. The first and foremost, is tax compliance. The tax return is filed based on the accounting records a business has maintained. A good accounting system ensures the figure is correct and precise. You do not have to do extra work on the tax return, because the figures are already there. The other merit is when it comes to audit, you can easily find supporting documents for every figure when you need to provide these. 

For example one of our clients is under IRD’s Audit and asked to supply documents from 2009 to 2013. Because he filed all his returns himself and kept no proper records, these basic set of reports demanded by the tax officer cannot be provided

Good accounting benefits:  strategic planning

Apart from tax, accounting information is important for making decisions for the business. You can know how your business performs and find out what the problems are and where to improve by reading a well-organised accounting report.

Good accounting information also helps in strategic planning for a business. Strategic planning is not just a big word for the nation-wide enterprises; it is also about small businesses. Take a lawn mowing business for example, when the owner is facing the question whether to hire new staff. The owner can investigate the business cash flow situation and have an idea on whether the outward salary will dry up the cash flow cause difficulty in paying other bills. It is the simplest example of strategic planning, but, it is based on the accounting information held.