The Most Common Misconceptions About Business Accounting Explained

Women at a desk with open books laptops and a tablet discussing business

It’s only natural that a small business owner wants to be the one to take care of their business’s finances. After all, their success depends on their business’s success. But accounting is a crucial business function that requires more than paying bills, tracking revenues and expenses and paying taxes.

A firm that does small business accounting in Toronto can certainly handle those important tasks for its clients. But it’s the business insights an accountant provides to their clients to help them reduce their business costs, make the right investments, grow their businesses, etc., that is the true value of an accountant to a small business owner.

Through their education, training and experience, accountants become experts in the financial management of businesses. And since every business’s success and survival depends on how it performs financially, every business needs the guidance of a trained professional, even if it’s only once in a while.

Unfortunately, many small business owners have misconceptions about what business accounting actually is. Those misconceptions are dangerous and can lead to the failure of a business. That’s why we’ve set out to dispel them below. As small business accountants, we’re on the side of small business owners and want to see them prosper.

Accounting and Bookkeeping are the Same Thing

This is a fundamental misunderstanding of what accounting is, and because of it, many small business owners aren’t aware of what an accountant can do for a small business to help it grow and succeed. Accounting and bookkeeping are similar, but they perform different functions for a business.

In a nutshell, bookkeeping is the recording of a business’s day-to-day transactions and the conducting of bank reconciliations. 

Accountants take the numbers recorded by a bookkeeper and use them to perform various calculations and draft reports that look at the numbers from various angles. These angles help an accountant see exactly how a small business is performing and give the accountant hard data they can use to predict how a small business will perform in the future and what the best course of action is moving forward. Of course, this is only a brief summary of what accountants do.

Accounting Only Needs to be Done at Tax Time

Both bookkeeping and accounting need to be done year-round. There will be more bookkeeping to do at tax time to prepare a small business’s return, but a business tax accountant is mainly concerned with advising a small business on how it should report its activities to ensure that the business is fully compliant with all applicable laws and standards. An accountant will also advise you on the optimal method for reporting inventory costs, calculating the depreciation of your assets, or reporting your business’s intangible assets to minimize your tax expense.

But tax season is not the only time a small business should do some accounting. As a matter of fact, the more accounting your business does throughout the year, the less it will ultimately pay in taxes because it was making tax-efficient decisions the entire year around.

But more crucially, if you only look at your small business’s financial health once a year at tax time, you risk your business not making it to the next tax year. For example, not staying on top of your accounts receivables and/or your cash flow is a mistake that has led many businesses to failure over the years.

Small business owners have woken up one morning only to discover that they had no cash to continue operating despite having significant inventory and money owing in receivables.

A man sitting at a desk with a laptop and calculator fills out paper forms with a pen

Accounting and Bookkeeping are Just Data Entry

By now, you know this is simply not true. In fact, many entrepreneurs consult an accountant at the outset of a new business venture. They will describe the vision they have for their startup and seek the accountant’s advice on which business structure would serve their interests. The type of business structure a founder chooses has a significant impact on how the business’s income is reported to the CRA, its ability to attract investors or funding, potential operating costs, and many other considerations.

Entrepreneurs also consult accountants to help them register a business in Toronto, prepare financial statements they need for their business plans, and for assistance in finding funding and filling out loan and grant applications.

Once a business is up and running, the following accounting tasks help keep operations running smoothly and successfully:

  • Verifying and analyzing a small business’s financial data.
  • Creating financial statements such as income statements, balance sheets and cash flow statements.
  • Performing internal audits and preparing the business in the event of an audit.
  • Examining expenses and finding financial inefficiencies.
  • Managing employee payroll.
  • Performing account reconciliations.
  • Drafting and collecting invoices.
  • Profitability analyses.
  • Ensuring provincial and federal regulation compliance.
  • Creating financial strategies.
  • Advising clients on personal estate planning and wealth management

Hiring an Accountant is Expensive /  Is Only for Larger Companies

The fact that successful businesses rely heavily on their accounting departments is a good example of the importance of accounting professionals to businesses. The good news is that the idea that accountants are too expensive for a small business is a misconception.

You can access small business accounting services cost-effectively (and more conveniently) by partnering with online accountants for small businesses.

You can also benefit from small business accounting services without having a big accounting budget if you’re willing to do some work yourself.

With the number of free or inexpensive bookkeeping tools available today, you can accurately manage your books and can have an accountant come in for a quick consultation when you need to make a financial decision. Even a few accounting insights can greatly improve your cash flow and business planning abilities.