When I started an accounting practice in 1998, we did accounts from BankLink data – although a few clients used either MYOB 8 or QuickBooks 5. Today business owners tend to use an accounting package, either “in the cloud” or on the desktop. But do you understand what it says?
Our focus is helping clients get it right during the year, so at year end there is minimal effort. With the aid of tools like TeamViewer, we help clients work through getting GST right, recording a new vehicle purchase, getting PAYE, etc. right, and so on.
But sometimes it helps to see the bigger picture. Many owners assume what their package or accountant gives them is correct. It doesn't matter who does your accounts - as business owner / director, the responsibility is yours. So lets have a think about accounts with a wider angle lens.
Two main essentials are profit and loss (statement of financial performance) and balance sheet (statement of financial position).
Profit and loss
This shows how much you made in the period concerned. For this purpose I shall talk about annual financial accounts.
The big question is what constitutes profit? There are detailed rules on what expenses are deductible - but the two general rules are they're either part of generating income, or they're involved in running a business which generates income. There are lots of exceptions, variations, explanations, etc. which is why people use accountants. But those two general rules cover most expenditure.
Of course they don't say what's an expense as opposed to an asset, what's fully deductible and what's only partially deductible (and what to do with the non-deductible portion) and many other questions. And they don't detail what happens when the tax rules and the accounting rules differ (e.g. accounting fees accrual).
There is also not a lot to check the profit and loss against – the main one being your knowledge of what happened in the period. (Comparing with last year often helps.) Does it make sense? The business owner is the best judge of that. Some other details can be checked against external sources – wages, interest received, and so on.