Accounting is one of those little-understood but surprisingly revered areas of business. It does get a little complicated but all in all, accounting is all about keeping track of, analysing and reporting the transactions of a business or entity to make financial sense of whether they are coming or going. If you’re a total beginner to business and accounting for small businesses, let’s discuss the why, the how, and the what of accounting for small businesses.
Why do we do accounting?
We first need to understand why we do accounting in business. As you have already seen, we need to keep track of the transactions of the business and their ultimate impact. In the words of Peter Drucker, “if you cannot measure something, you cannot improve”. Accounting, in simple terms, is the measurement of business performance. There is another reason for accounting in a business, and that is reporting on the performance.
Reporting
One of the key concepts of business is the separation of agency. So we can have the owners and managers of business being separate people. These owners need to be reported on the performance of the business. The government is also interested in reporting business performance for tax purposes. In simple terms, businesses pay tax based on their profit or income, so this needs to be known to tax correctly. Finally, there may be other stakeholders affected by or interested in the business’s activities, and these would also be interested in some information from the business.
Performance Management
Performance management uses quantitative and qualitative information gathered about a business’s operations to improve or optimise the business’s performance. As we can imagine, a lot of this comes from accounting information. This accounting section is sometimes referred to as management accounting, and the information is for internal use, unlike reporting information you would’ve surmised is for internal and external use.
So that’s the why and the what of accounting now; let’s look at the how. There’s obviously a lot to talk about, but we can look at a summarised version of the accounting processes for small businesses.
Stages of accounting for small businesses
The best way to look at it is in the stages through which you go when preparing accounting information for a business. We will use a month as our cycle though some stages may go beyond a month.
Bookkeeping
Bookkeeping is the process of the original entry of accounting information. Bookkeepers take documents such as receipts, invoices, despatch orders and bank transactions and record them in books of accounting. So the goal of bookkeeping is to capture all information pertaining to the business accurately and prepare for the accounting function to use the information.
Accounts
So once we have the information, we still need to organise it. The goal of accounts is to group transactions together so we can make sense of them. To put it practically, this is where you will group transactions to do with motor vehicle expenses in one place, sales in another and internet expenses in another place still. This is where that internal performance management information will be drawn from. It is also the place where we draw information for reporting.
Reports
So we already discussed why we report, but what are the different reports? The statement of profit and loss or statement of financial performance measures how well (or poorly) the business is performing. Is it generating a profit and a loss, and if so, how much? With these reports, there are rules we have to follow when it comes to the treatment of transactions; it’s not all as it seems. Next up, we have the Balance or the Statement of Financial Position. There’s not a lot of creative naming in accounting, so again, this statement sounds like the name. We want to establish the balance of what the business owes and owns. We want to establish the financial position; does it owe more than it owns, or owns more than it owes? These are the two main reports, and they are required annually for tax purposes. Other stakeholders may require them more often. It is best for management to prepare these monthly. Another important report is the cash flow statement, which, again, as the name suggests, reports whether cash is flowing into or out of business in net.
Statutory matters
There are statutory matters when it comes to accounting for small businesses; these are matters of law. The main one to be aware of is Value Added Tax; this is a tax levied on certain transactions that you must submit to ZIMRA after determining the net position of the VAT you have collected versus the VAT you have paid. There are different reporting cycles, but the most frequent is monthly. VAT is required when a business makes a certain amount of money per year or is expected to do so.
Audit and Internal Control
Audit is a function of accounting that is misunderstood. The purpose of an Audit is to ensure that the information we report is correct, including both financial and non-financial information. For the most part, audit seems like a retroactive process, and that is where internal control comes in. Internal control is a business function that ensures we record things correctly and follow procedures. Small businesses are not required to submit audited reports, but ZIMRA may select a small business for audit. Internal control is important to all businesses as a preventative measure.
You can click the term as the links are embedded to learn more about the terms and areas mentioned. Each one will take you to an article that explains these things in greater detail.
