Accounting is how finances are tracked. As an individual, you may only ever use an accountant by way of an online form for submitting your taxes. Those are handled by certified public accountants (CPAs), who pass an exam to prove their mastery of accounting.
For businesses, though, tax collectors, regulators and other oversight agencies want to see thorough and proper accounting records. If your business ever seeks investors or other shareholders, these agencies will review your accounting paperwork. When you see a deal made on a show like The Profit or Shark Tank that later falls apart, it’s almost always because of accounting problems.
Unless you are well versed in finance, your business will likely need to enlist the help of a professional accountant. Here’s a breakdown of what accountants can do for your company.
What do accountants do?
The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” Accountants log a business’s accounts payable, accounts receivable and other financial transactions, typically using accounting software.
[Related: Best Accounting Software for Small Business]
“Accountants use the work done by bookkeepers to produce and analyze financial reports,” said Stan Snyder, CPA. “Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business – managerial, financial reporting, projection, analysis and tax reporting.”
In the United States, most accountants abide by the generally accepted accounting principles to present a company’s financial information to those outside the company in a format that everyone can understand. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.
Here are some of accountants’ main job duties:
Record transactions: Depending on the volume of transactions, an accountant may record each transaction (e.g., billing customers, receiving cash from customers, paying vendors) daily or weekly.
Document and file receipts: Accountants may copy all invoices sent, all cash receipts (cash, check and credit card deposits) and all cash payments (cash, check and credit card statements). They also may start a filing system that is easy to understand, track and maintain.
Pay vendors and sign checks: Accountants may track accounts payable and have funds scheduled to pay suppliers on time and avoid late fees.
Balance business checkbooks: Accountants may do this monthly to ensure that your business’s cash transaction entries are accurate and that you are working with the correct cash position.
Process or review payroll and approve tax payments: You need to meet payroll tax requirements based on federal, state and local laws at different times. Accountants make sure you withhold, report, and deposit the applicable income, Social Security, Medicare and disability taxes to the appropriate agencies by the required dates.
What is an accounting cycle?
An accounting cycle is the process your company has in place for recording and analyzing the various accounting-related events within your company. It’s important to establish effective bookkeeping and accounting practices in order to manage the financial health of your company.
There are eight main steps in an effective accounting cycle:
Identifying transactions: This is the basic step of establishing accurate and correct recordkeeping practices. Accounting software and POS systems can often assist with this.
Recording transactions: Much like step one, recording can be accomplished with cloud-based software systems. The key is for every transaction your business engages in to be recorded somewhere.
Posting: When a transaction is recorded, it should be posted to a general ledger, which holds the total transactions of the entire business.
Listing unadjusted trial balance: This is the review of your company’s finances at the end of the accounting period – which could be quarterly, monthly or on another predetermined basis. Trial balances are established for each account within your business at the end of each period.
Creating worksheets: These sheets identify where adjustments need to be made to each balance.
Adjusting journal entries: Any necessary adjustments may be recorded as their own journal entries.
Generating financial statements: Most businesses need an income statement, balance sheet and cash flow statement.
Closing the books: The accountant wraps up the cycle with a closing entry, which resets the temporary account balances on the general ledger and serves as an overview of the given time period for future analysis.