Accounting: Don’t Reinvent the Wheel When Accounting for Your
By Gene Siciliano
It has been
said that the only thing that’s constant is change, and if you’ve
been in business for any length of time, you know how true this is.
If there’s one thing that sets companies that have been successful
over the long haul—think IBM, General Electric, Wal-Mart or
Microsoft, for example—apart from all the others, it’s their
positive reaction to change.
change impacts a company’s ability to capture and hold onto its
market, grow its business and profitably sell its products and
services. However, every small business owner or manager must learn
to differentiate between those business processes that must evolve
and those that should remain stable.
When Change Is Destructive:
evolving in order to meet changing consumer demands and an
ever-shifting technological environment is essential, there are some
business processes where change and evolution are
counter-productive, even destructive. Financial accounting is one of
accounting scandals that brought down several large corporations in
the early 2000s illustrated the destructive potential of getting too
“creative” when it comes to financial accounting. While the
government passed legislation that attempted to tamp down such
accounting irregularities, it’s still primarily the responsibility
of business owners and their accounting professionals to create and
provide financial information that is what I call ARTistic:
Accurate, Relevant and Timely.
rules can and do change over time to reflect changing business
models and new types of business transactions. However, financial
accounting as a business process should remain stable, evolving only
after careful thought is given to the potential implications of
reporting transactions differently.
overview of the basics of financial accounting is way beyond the
scope of this article. However, by sharing a few standard accounting
concepts with you, I hope I’ll motivate you to perhaps take a little
bit closer look at the financial statements your CPA slides across
your desk next month.
The Chart of Accounts:
Let’s start at the beginning: with the financial data
recording system that’s known as the chart of accounts. This is a
systematic listing of all ledger account names and associated
numbers used by your company, arranged in the order in which they
will appear in your financial statements (more on them in a minute):
usually Assets, Liabilities, Owner’s or Stockholder’s Equity,
Revenue and Expenses.
A chart of
accounts allows the orderly reporting and summary of all of your
company’s financial transactions. For example, you can go back and
look at all vendor invoices paid during a specific timeframe to
determine exactly what work was done, why it was done and what
organization benefitted from the expenditures.
the chart of accounts as a collection of buckets, each with a
particular kind of data inside. There might be a bucket for each
asset your company owns, each debt you owe, each product or service
you sell, and each type of expense you incur to sell products and
of accounts is an organized, comprehensive list of all these
buckets. The buckets, in turn, are labeled with the appropriate
account number and arranged by the kind of data they hold. They can
be rearranged during the accounting process as their contents are
counted and checked (usually monthly) so reports can be produced
that summarize the data they contain.
The General Ledger:
No, this isn’t the person who secretly runs the accounting
department and issues all those reports nobody can read! The general
ledger is the place where all accounting transactions ultimately
come to rest, and the data source for your financial statements.
the general ledger as a large, old-fashioned scale that is always
kept in balance by adding and subtracting an equal and offsetting
amount of weight to each side. All of the buckets that appear in the
chart of accounts are arranged in one or the other of the trays. As
transactions occur, you add to each bucket the appropriate data that
represents the financial effect of that transaction.
something is added to a bucket on the Asset side, for example,
something else of equal value either must be taken away from the
Asset side (such as the cash paid to acquire the asset) or added to
the Liability side (such as a loan taken out to pay for it). This
way, the scale always remains in balance and your company has a
self-checking system to ensure that the entire transaction has been
The Financial Statements:
These are the real “meat and potatoes” of small
business accounting. There are three primary financial statement
formats that appear in annual reports and most business’ internal
monthly financial reports:
This shows the financial condition of the company as of a
particular date, usually the end of a month, quarter or year. It
lists all of your company’s assets on one side and all of your
liabilities on the other. The difference between the carrying
value of the assets and liabilities is equal to the equity
interest accruing to the owners.
Also commonly referred to as the Profit and Loss Statement, or
the P&L, this recaps all of the company activities that were
intended to produce a profit. It lists the amount of sales, all
the costs incurred in making those sales (or the cost of goods
sold), and the overhead costs incurred in running your company’s
operations (e.g., salaries, rent, utilities, etc.).
This shows the effect of all the transactions that involved or
influenced cash but didn’t appear on the income statement. For
example, if you borrow money and deposit it in your checking
account for use later, no income or expenses have been created,
so this activity can’t be reflected on the income statement.
Instead, it would go on the statement of cash flow. Every
transaction that occurs in your company between any two balance
sheet dates will be reflected in either the income statement or
the statement of cash flow, and from those two reports the
summarized results appear in your balance sheet in the form of
net changes to balances.
Make Better Business Decisions:
The key to sound
decision-making will be your ability to understand and use these
critically important business reports. They are the condensed result
of every financial transaction your company has undertaken, and the
result needs to be accurate, relevant, timely and understood.
This is a
role that cannot be delegated. Don’t shy away from asking your
accounting department or CPA to explain any aspect of these reports
until you really understand them. The success of your business
depends on it.
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