What is Accounting?
Accounting refers to the practice of tracking a business's income and expenses and using those figures to evaluate its financial status.
If you think you only need an accountant during tax time, you may want to think again. Good business accounting is not just about balance sheets and tax returns. With the help of a competent accountant, you can track your business's finances and make sure it's running at the optimum level. Moreover, if one wants to pass the business on to his or her family, an accountant could suggest ways of doing so without having the family hit by a huge tax burden. And to take it even one step further, your accountant is a great resource to tap into for business valuation and business consulting purposes. Whether you need to get your financial statements in order or an audit to present to potential investors, exploring the spectrum of services your accountant offers could help you turn that once-a-year, tax-time meeting into an invaluable year-round resource. The three main choices for small business accounting solutions are hiring a traditional accounting firm, using a hosted accounting service, or doing your accounting in-house. Most companies initially handle the bookkeeping in-house. Buying a popular program like Intuit’s QuickBooks provides an inexpensive accounting solution that lets you do enough record keeping to satisfy the IRS and your financial backers. It can be a challenge to keep up with the record keeping, however, and if without a good understanding of the fundamentals of accounting, you may make costly mistakes in the long run. Many businesses hire an in-house accountant as they begin to grow past 10 or 20 employees, depending quite a bit on industry their in and the type of business. Accounting firms can do more for your business than simply filing your taxes and creating financial statements. They offer an accounting solution that includes audits, tax planning, financial consulting, business valuation, and advice for growing your business and cutting costs. However, many of these services carry additional charges. Accounting firms are a good choice if you business faces unusual financial situations or don’t have a lot of financial expertise on staff. But the business of accountants goes beyond just basic number-crunching. Accountants include a number of other services in their repertoire: auditing services, tax planning, business consulting, business valuation, and financial planning, just to name a few. Typically, accountants handling the books take care of accounts receivable and accounts payable, put together financial statements (such as balance sheets, income statements, and cash flow statements) and take care of bank reconciliation. The cost climbs as the volume of work expands. The more transactions and the more statements you expect your accountant to prepare, not to mention how often you want these financial statements whether they be monthly or yearly, the more you'll pay.
What is BOOKEEPING
One of the most basic accounting services is bookkeeping, which involves keeping a record of all financial transactions and then preparing financial statements such as balance sheets and income statements. In bookkeeping, an accountant keeps a comprehensive record of how much your business owes creditors and how much is owed to you. The records of these transactions also indicate how much you have invested in equipment and inventory. Accountants can then take this information and roll it into tax services, another basic accounting service.
Financial planning has really taken off in the past five to 10 years for accountants. This service turns the focus from the business to the business owner. The need for financial planning becomes more pressing when a business owner starts to look at long-term care insurance, wills and trusts, and estate planning.
Hosted accounting solutions – also called online applications, or ASP solutions – are a useful middle ground. These providers offer an accounting solution that you access through a web browser. They store all your financial data with comprehensive security and backup procedures – more than most small businesses have on their own data. They provide all the basic accounting services, including accounts payable and receivable, ledgers, invoicing, reporting, and can even include payroll, check writing, and expense reports. While not as comprehensive as the accounting firms, a hosted accounting solution can be an excellent and inexpensive way to meet your financial obligations.
Taxes are one of those areas that can easily be underestimated. When tax time rolls around, a good accountant, in preparing your return, can help ensure that the necessary steps have been taken to minimize filing errors that can trigger an audit. But if you're just in and out of your accountant's office when it comes time to do your taxes, you could be missing out on a major money-saver. A knowledgeable tax accountant can suggest ways your business can save thousands of dollars through tax planning and tax-saving strategies. In tackling these issues, you and your accountant can also look for ways to add value to your business. Of course, the more complex the tax planning and the more ongoing the tax services are, the higher your bill. But in the long term, the tax dollars saved makes this extra expense worth every penny.
Audits are mandatory for public companies; private companies don't have to conduct audits unless a bank or an outside investor requests one. Accountants might handle an audit for a private company, for example, that is looking for funding from investors who want to have an independent opinion on the fairness of the company's books, financial statements, and financial position. Most audits can be divided into two phases: the accounting work done to prepare for the audit, and the audit itself. Make sure it's clear in the beginning what you're paying for. While some accountants will give you cost estimates for these two aspects of the audit, others will simply give you one estimate for the audit and add-on costs at the end for the preparation.