I have found over the years that many small business owners start out attempting to do their financial record keeping themselves. The smart business owners quickly realize that there is an awful lot of work that goes into maintaining a company’s books and that their time is better spent concentrating on producing and selling their product or service. Or they realize that they just don’t have the knowledge or patience to do it. The really smart ones know this from the beginning. Regardless, the outcome is that the small business owner then hires a bookkeeper to do the bookkeeping.
I think this is generally because either (a) the business can only afford to hire a “slightly-above-minimum-wage” worker, or (b) most small business owners think that a bookkeeper or bookkeeping service is all they need to keep accurate books and thus to know how their business is doing financially. I’m here to explain why I believe that every small business needs the help of an accountant, not just a bookkeeper.
I’ve got nothing against bookkeepers; I was one once. And I’m not saying that a small business should not hire a bookkeeper. What I’m saying is that in addition to a bookkeeper, a small business needs the knowledge and expertise of an accountant in order to completely and accurately record all of the financial transactions that a business can encounter and to fully understand what the numbers are communicating.
All businesses – not just small businesses – need someone to maintain a record of the day-to-day financial transactions of the organization. This means keeping a record of the money that is received and/or spent each day (income and expenses); items that are purchased but will be paid for at a later time (accounts payable); and, products that have been sold or work that has been completed but that the customer will pay for later (accounts receivable). That’s what a bookkeeper does.
But there is more to the whole accounting picture than just these types of transactions. For example, there are:
- Fixed assets and depreciation
- Knowing if an item is even considered a fixed asset or not
- How to account for the long term lease that you just signed for the building that you’ll be operating in
- How to account for the line of credit or business loan that you got from your bank to start your business
- How to account for the money that you personally put into and take out of the business
- The myriad of transactions involved in payroll, payroll taxes, paid vacation, and employee benefits
- What constitutes a prepaid expense
- How to handle customer deposits
Just to name a few.
The title “bookkeeper” implies a specific level of understanding, education and skill relative to the entire accounting process and that level is at the bottom of the accounting hierarchy. Not because bookkeepers are inferior, but because it is the first stage of knowledge and training that a person who is interested in numbers and accounting achieves.
Anyone who is hired as a bookkeeper should have at least a high school diploma and have taken bookkeeping or accounting classes (with no lower than a B average) and preferably also completed at least one college class. All of this signifies to an employer that the individual possesses a minimum of competence and ability. But most bookkeepers haven’t received training in accounting for more complex issues like those listed above. Therefore, they just don’t have the depth of knowledge, education and skill to handle these more advanced types of transactions.
I think that every business owner would agree that just keeping track of a business’ daily transactions is not enough for the business owner to fully understand what is happening financially with his business. Every business owner then needs someone to take that day-to-day financial information, add to it the more complex general journal entries like depreciation expense, interest calculations, etc., and then put it together in such a way that it will communicate a clear picture of what happened financially over a specified time period. That means producing financial statements and reports. And that is what accountants do.
The title “accountant” signifies that the individual has reached the next rung of the accounting hierarchy. They have received more advanced training regarding the rules of generally accepted accounting principles and are much better prepared to correctly understand how transactions should be posted so that they consistently and accurately reflect the reality of what is going on in the business. (Those are two big words in accounting: consistency and accuracy.) Accountants also typically know something about taxes and preparing tax returns so they can help ensure that your accounting entries are categorized correctly and your business is following current tax law.
In addition, an accountant has the knowledge to prepare the basic financial statements such as an income statement (also known as a profit and loss statement) and a balance sheet. They can then help you analyze the financial data to determine if you are pricing your product or service correctly, if you are adhering to your budget and if you’ll be able to pay your bills by the end of the month.
Here’s a real life example of a situation that I experienced: I went to work for a company that had had the same accounting person working for them for a dozen years. This person held the title of Controller at this firm. But after just a couple of weeks on the job, it became clear to me that this person was really just a bookkeeper. They had had no formal education, only prior work experience. Following is a list of some of the problems that I discovered:
- The chart of accounts that they were working with was redundant and therefore, confusing and much too long
- A number of accounts had been created as assets when they were really liabilities
- Items that should have been expensed were capitalized as assets
- An adjustment was being made to accounts receivable at the end of each month but wasn’t being reversed thus causing accounts receivable to be overstated
- Accounting entries were being posted on a net basis so actual income and expenses were being understated
- There were no reports being prepared and presented to management each month so no one was aware that income was trending down and that the bank accounts were running dry
If you don’t understand some of the terms that I just used, I do apologize, but that is the language of accountants and as a small business owner, you need to be somewhat familiar with it.
If you can’t afford to hire an accountant full time, try finding one that does freelance work and will be available on a weekly basis for a few hours each week. Or if you feel that you need someone to handle the record keeping on a daily basis, hire a bookkeeper, then find an accounting firm that offers accounting services and arrange to have them review the bookkeeper’s work on a monthly or quarterly basis depending on the number and complexity of transactions that your business has. Regardless, you should at least have a relationship with an accountant so that your bookkeeper has someone to call whenever they need accounting help with a situation that they don’t understand or have never experienced before.
And I don’t mean specifically a tax accountant. No offense intended toward tax accountants, however many of them specialize in preparing tax returns, not in preparing accounting entries and financial reports in accordance with generally accepted accounting principles and that’s what you really need. And speaking of taxes, having your bookkeeper’s work reviewed by an accountant prior to tax time can simplify and reduce the work that your tax accountant needs to do. Bonus!
I hope you found the above information worthwhile. If so, please leave me a comment and let me know what hit home for you. Even better, share this post with someone you believe could find it useful as well. If I have provoked any questions, please post those too and I’ll do my best to answer them.
Great information. Thanks for the info