I was first exposed to accounting in business school back in the late 1990’s. It was part of the coursework required for my finance major. The classes were boring but the practical work, while repetitive, was in a way satisfying. Accounting is relatively well bound in its practice but buying accounting services, sometimes called bookkeeping, […]
I was first exposed to accounting in business school back in the late 1990’s. It was part of the coursework required for my finance major. The classes were boring but the practical work, while repetitive, was in a way satisfying. Accounting is relatively well bound in its practice but buying accounting services, sometimes called bookkeeping, is a different animal in and of itself.
Accounting as a discipline focuses on recording financial transactions in your company to provide financial statements. That is it. In practice, accountants will work to provide you three primary statements: i) income statement ii) balance sheet iii) cash flow statement.
The income statement also goes by the name of a profit and loss statement. It primarily records sales transactions and costs. These two in turn branch out to three different practices. Sales is generally handled through accounts receivables, third party costs through accounts payables and finally employee costs through payroll. And because life is not always that simple we use a general ledger to adjust certain revenue and cost figures through general ledger entries. I hope I have not lost you here.
Accounting works on a principal of balance. In other words when something is recorded on the income statement it will have a counterpart on the balance sheet. This is the repository of your business, the place where we find money you have or will get and money you owe or may owe in the future. Counterparts of sales on the income statement is found in the accounts receivable if people don’t pay right away, else it would go in the bank account, both on the left hand side of the balance sheet; similarly if you buy from suppliers and do not pay them right away the money you owe will be recorded in accounts payable. Payroll and especially taxes related to payroll is often recorded the same way.
Bank debt also goes into the balance sheet and any money you take from shareholders is also recorded in the equity account on the right hand side of the balance sheet with the counterpart found in the bank accounts. These are the only entries that do not get recorded in the income statement.
As you get money in and money out whether it is from sales, banks, shareholders, employee and supplier payments, they are all feeding these daily, weekly, monthly, quarterly and yearly movements of cash. We call these movements cash flows. Positive cash flows are money coming in and negative cash flows are money going out. I am sure you are already familiar with this concept.
Most accounting firms out there (and I mean around the world) will offer you what I would call basic services and that covers the creation of these three different statements. But the way these statements are produced varies a lot.
The first big variance is driven by an important choice you have to make and that is choosing whether you want to work against an accrual principal or cash principal.
Accrual accounting differs from cash accounting because it records the transaction ahead of cash being received or being spent. Here is a simple example: you sell a product to a client and you agree to get paid in 45 days. The accrual principle will require you to record the sale as soon as you have issued the invoice even if you have not yet received the money. In practice it means that you will record revenue and have in your balance sheet in accounts receivable a debt that your client will have to pay. Entering the transaction will also require you to indicate when is the payment owed which in turn will make it easier to manage what we call your aged balance. Cash accounting in turn only records the sales when you get the cash.
While both practices have their pros and cons, note that accrual accounting requires more management time and also more time from your accountants. This will increase the cost of the service you buy. So cash accounting is generally a good way to start for small businesses and startups. And when you decide to move to accrual do so really considering whether you need it to better manage your company and also offer perhaps better facilities to your clients and start to professionalize your purchasing by getting payment terms.
One more thing about cash vs. accrual: the day you chose one and decide to move to the other has to be well thought through. Indeed authorities that look at your business want to make sure you do not change all the time to alter the picture of your business. So think carefully.
One of the single largest cost items for any company is people. Yet not all companies provide Payroll in their basic accounting services. This I found being more of a geographical difference.
In Finland, companies like Talenom offer you a bundled accounting service that covers it all. In the US however you have to choose an accounting service supplier and a payroll and benefits vendor. Indinero will offer you accounting services, but you may have to choose a TriNet or a Justworks for your payroll services.
An unbundled service is therefore not always evitable depending on where you operate. However as much as you can, look for vendors that can bundle all services together. You will save a ton and avoid massive headaches to coordinate especially if systems are not well developed or are incompatible between your vendors.
You thought this was over. Of course not! It’s one thing to have found the kind of service you need but now the question is what system do you actually require.
Some vendors will make it very simple for you: they won’t give you a choice. Yes that’s right. Some accounting services have their own in-house system. In many cases these were born from developing these kind of software and then a subsequent realisation that they would be more competitive by offering the service also.
Other vendors are quite flexible but will often be working with a few vendors such as Quickbooks for instance. This is relatively normal. Indeed the fewer systems you work with the more scope benefits you get which should translate to lower cost for your clients. Now this is not always true so if you see this make sure to negotiate hard.
Now the other aspect to pay attention to when it comes to system is the ability for you to get out of it. You don’t want to enter into a captive model where the data generated by the system cannot be extracted and easily converted into another one. Not being able to do so will affect your ability to change accountants if you want or need to. So be sensitive to that point. One way to test this is to see whether in its services the vendor offers a year end extract of all transactions into a digital format that you can store and re-use at any point of time should you decide to switch.
The statements you produce are not just for your own use. They are often used for management as well as for statutory purposes. This has led to many vendors expanding from core accounting services to include a range of auxiliary services.
The first service that will often be offered are tax related. This is a very natural extension and many now also offer this as part of their core services, with at least a monthly statutory filing. A yearly filing tends to be a secondary option. Yearly filing generally requires a lot of re-treatment that takes time and are often harder to predict. Those offering it often price it by the hour as opposed to a package.
Some vendors also offer accounts consolidation services. This is often handy for companies with multiple subsidiaries, branches and international operations. Getting this done is not as straightforward as one may think. Indeed each country will likely operate on a different chart of accounts imposed by the country, thus making accounts conversion not linear. Currencies and other accounting practices will complicate the task further. So make sure that the firm you use is well versed with that and especially knows how to deal with specific countries where you operate. Else it will be a headache for you, so watch out for this point.
Your accountants will work for you to make sure your accounts are done. In saying that it means that they will require a number of tasks for you to perform. Some tasks will be ad hoc and some recurring.
What can or cannot be outsourced also partly depends on the services and systems available at your disposal. But here are a number of things you should expect to have to do no matter what:
Now besides these inputs, you are likely to be asked many questions related to the nature and the justification for the amounts that appear on the accounts. And of course if any of your system providers change interfaces, be ready to have to do a bit of IT investigating. So if you thought you could be off the hook from having to manage any part of your bookkeeping, I am deeply sorry to have shattered your dreams with the blunt reality of accounting.
Get onto Koble to find the best accounting firms for your business.