Dimensions of Modern Accounting

pensive female worker choosing folder with documents in modern office

Accounting as a discipline has evolved over a period of centuries. In the initial phase, it was thought to be restricted to mere bookkeeping or record-keeping of business transactions. However, gradually the importance of numbers contained in the accounting records of businesses became prominent and experts started generating a variety of reports to assist businesses to make informed decisions. In modern times accounting has thoroughly integrated with information technology to transform itself into a real-time information-based system that serves the needs of a variety of stakeholder groups interested in making an objective assessment of the financial health of a business. However, it is pathetic to know that majority of small businesses still regard accounting as mere bookkeeping and thus they remain oblivion to many of the benefits that modern accounting can render to enable them to make informed decisions.

Since the owner is the primary beneficiary of a business, therefore, it is imperative that he or she must take accounting as an essential support system to monitor the performance of the business from a variety of perspectives. Some of the key dimensions of modern accounting that are ironically ignored by owners of small businesses include the following.

Price setting of your products and services

The majority of small businesses set the prices of their products and services by following a rule of thumb approach or based on gut feeling. However, this is a naïve approach to price setting. Unless a business knows about its costs and their classification into fixed or variable components, a sustainable pricing policy cannot be adopted. Since price is a critical factor in generating sales, therefore, it must be viewed from a strategic or long-term perspective, which is not possible without analyzing the business’s cost structure. A variety of accounting methodologies, such as activity-based costing, marginal costing, absorption costing, and breakeven analysis may be used to determine a realistic pricing policy that ensures long-term growth in sales and profitability.

Proper understanding of profitability and liquidity of a business

For the majority of small businesses, profitability is the key determinant of the success of their business. However, it must be understood that profitability alone is not a guarantee that a business may survive in the long term unless its liquidity or solvency position remains intact. Profitability is the outcome of matching business expenses and receipts, while liquidity focuses on cash generation and the spending capacity of a business. Since cash is the king, therefore, a business with a strong liquidity base is more likely to survive in the long term than a business that merely generates more profits by relying on overtrading.

Knowing about Key Performance Indicators (KPIs) of a business

For many small businesses, the only KPI is the overall profitability of a business. However, if a business is asked how that profitability has arrived, they remain clueless about the factors that are responsible for the profitability or losses of a business. These factors may include classifying business expenses as avoidable and unavoidable, fixed and variable, marginal and incremental; and classifying sales of products and services as profitable and loss-making, stagnant and exponential, retrograde and progressive, etc. By developing and monitoring KPIs that focus on critical factors impacting a business, a successful business strategy may be developed that ensures long-term profitability and growth in the net worth of a business.

Tax impact of capital and revenue expenses:

A proper understating of the tax impact of capital and revenue expenses is vital to arrive at an accurate profitability figure. Many small businesses wrongly classify certain capital expenses as revenue expenses and vice versa. Consequently, the profitability figure may show erratic patterns and the tax liability of a business may be miscalculated.

Real time accounting systems:

Many small businesses keep their record in a conventional manner. However, nowadays many bookkeeping software are available in the market that may be used to develop a real-time-based accounting system that can be connected with spreadsheets for financial analysis.

Submitted by:

Baqar Bhatti LLB, CPA, CMA, CGMA | CEO & Owner of Panacea at Zenith | 289-952-3494 | accountants@pazca.com | www.pazca.com

November 27, 2020April 8, 2022

10 Essential Tasks for Year End

The year is quickly coming to a close, and many businesses are well underway with their Q4 prep. This is a crucial time to get organized, so you don’t miss an important item on your to-do list. To help you close the year off strong and start the new year off on a good foot, make sure to add these items to your list to tackle before year end.

1. Meet with your accountant or bookkeeper

Meeting with your accountant or bookkeeper prepares you well for the coming tax season and allows you to be proactive with your finances in the new year. Avoid the stress and headache of scrambling for receipts when tax time comes around. Use the meeting to ask questions, get organized, and create a system that will ease the overwhelm of bookkeeping.

2. Record all transactions

Make sure that all transactions up to the year-end date have been recorded, including unpaid bills and invoices. This is a good time to gather all of your receipts and get organized. The length of time this takes will depend on how organized you’ve been during the year.

If you’re finding that this step becomes overwhelming, speak to your accountant or bookkeeper about creating a system that will help you stay organized and maintain your books throughout the year. Take advantage of modern software and apps to easily store your supporting documents.

3. Do a bank reconciliation

It’s important to make sure that the transactions you’ve recorded match what’s on your bank and credit card statements. Quickbooks Online makes bank reconciliations much easier. Speak with your bookkeeper about this process.

4. Review your financial statements

This includes your income statement and balance sheet. You want to look for items that stand out to you or don’t make sense, including balances that seem too high or too low, large differences in balances from the previous year, and mistakes that you can correct before handing them to your accountant.

5. Check accounts receivable

Look through your list of invoices and investigate any that are outstanding. You’ll want to regularly go through your accounts receivable throughout the year to make sure that you are being paid.

6. Check accounts payable

Go through each item in your aged payables report and pay any late bills. Recording all of your appropriate expenses helps reduce your tax bill.

7. Check your inventory

Record what you have in stock and identify what sold and what didn’t this year. If your business only offers services, determine which services sold and what didn’t. This is a great way to establish a strategy for the coming year and focus on items in demand and discontinue the ones that don’t produce an adequate ROI.

8. Prepare your tax documents

You can either prepare your income tax yourself or send over the documents to your accountant. A cloud-based accounting software like Quickbooks Online allows your accountant to access your business records online, making for a more streamlined and efficient process.

9. Plan for the new year

Once you’ve completed all of the necessary financial tasks and laid the groundwork for the coming year, you’re ready to strategize and build a solid plan for the new year. Whether it’s a goal to hit a certain number in sales, hiring for a new position, or strategizing a way that you can have more downtime, it’s essential to have a target to aim for. Be sure that your goals line up with your long-term objectives and that they are moving the needle for your business.

10. Take time to reflect

Often, business owners become immersed in the business’s day-to-day operations that the bigger picture takes a back seat. Going through the year-end checklist not only gives you a view of where your business is at, but it also gives you the opportunity to reflect – a critical piece of the puzzle when running a business.

Did you achieve the goals that you set out at the beginning of the year? Is your business providing you with the time, income, and joy that you had hoped for? Are you enjoying being a business owner? Taking the time to look back at all of what’s happened through the year helps you slow down and make the right decisions so you can hit the ground running in the new year.

Submitted By:

Sal Rezai – Cloud Accounting Specialist, Advanced QuickBooks ProAdvisor & QuickBooks Training Advisor and Founder at: www.accountingbysal.ca | info@accountingbysal.ca

November 4, 2019April 9, 2022