Did you know that only 86.8% of startups make it to their second year in business? Or that only 65% of businesses survive past year three and less than half make it 10 years or longer?
The success of every business depends on its financial health. So it’s crucial that as a business owner, you get a small business accountant in Toronto involved in your financial decisions early and often.
In this study, the top reason responding business owners cited for their failure was that “they ran out of cash.” Business accounting is not something that can be done effectively in your head, in a notebook or even using a spreadsheet. It requires years of training, experience and knowledge to ensure that your business not only survives but that it flourishes.
If you’re wondering, “What is business accounting, and why is it important?” you’re in the right place. To answer these important questions, this post will cover:
- What is business accounting?
- What are the types of business accounting?
- What is the role of accounting in business?
Keep reading to better understand business accounting and the role it plays in a business’s success.
What is Business Accounting?
Simply put, business accounting is the recording of every single transaction a business makes, organizing that information, reporting it when needed and analyzing the data to know where the business stands financially and how each part of the business is performing.
It’s a lot of work. And because of its importance, many small business owners use business accounting services to help them with the bookkeeping, payroll, tax reporting, business strategy and financial planning that business accounting entails.
What Are the Types of Business Accounting?
There are two accounting methods businesses use for recording transactions: the cash method and the accrual method.
Businesses using the cash method only record transactions when money changes hands. For example, if a mechanic completes a brake job and receives payment immediately, the transaction is recorded that day. But if the mechanic’s customer doesn’t pay it until 30 days later, the transaction is recorded then.
With the accrual method of accounting, a business records transactions twice as two separate transactions, once when a good or service is sold, or an invoice is received, and again when the money is paid. So in the example above, when the mechanic gets paid a month after the brake job, the transaction is recorded immediately after the brake job is complete and then again 30 days later when the money is paid.
A business will choose which method it uses based on which best suits its needs. The cash method is easier to manage and gives an accurate picture of how much cash a business has on hand. The accrual method provides greater overall insights on revenue and expenses over periods of time. The accounting method a business uses also affects how it files its tax return with the CRA.
Other Types of Business Accounting
Additionally, businesses will do more specific types of accounting depending on the tasks they need to complete. Some of these include:
- Auditing – This is done to confirm the accuracy of the financial records and that proper accounting methods are being used.
- Cost Accounting – A business will analyze its costs to make a product or provide a service to make decisions about pricing, inventory and spending.
- Credit Accounting – When a business needs to know how much of its cash is being used to pay debts and liabilities, it will turn to credit accounting.
- Fiduciary Accounting – This type of accounting is done for organizations that manage trusts and estates on behalf of their beneficiaries.
- Financial Accounting – This is when financial statements are prepared for investors, lenders, government agencies, and other outside entities to analyze a business’s financial position.
- Forensic Accounting – Will be done by an agency investigating a company for illegal activity.
- Managerial Accounting – Is a combination of cost accounting and financial accounting that is done internally for management to make strategic business decisions.
- Tax Accounting – Accountants do this at tax time to help business owners find ways to reduce their taxes.
What is the Role of Accounting in Business?
Besides bookkeeping, financial data analysis and financial reports, business accounting also helps businesses complete critical business functions. Some of these include:
- Employee payroll. From ensuring that everyone is getting paid correctly and on time to paying the right amount of taxes, there’s a lot of work involved in paying staff.
- Loans and investments. Detailed and pristine financial records are required if a business needs financing to expand.
- Staying current on receivables and payables. Having access to updated and accurate balance sheets helps businesses stay on top of their bills and reminds them to follow up with customers who have outstanding accounts.
Why Use an Accountant for Your Business?
Here are just a few of the benefits of using an accountant:
- Accountants can help you make sound business decisions that can grow your business by providing expert financial insights.
- A certified accountant ensures that all of your financial activities comply with laws and regulations.
- Your business will pay the lowest possible taxes. Accountants know the ins and outs of corporate tax filing and find you deductions non-accountants won’t know about.
Also, by using a licensed professional, you are freed up to spend more time running your business with the peace of mind that comes with knowing that an expert is handling your finances.
Some accounting firms also offer convenient online accounting services for small business owners, giving them even more time and energy to dedicate to their businesses.
Further reading: check out these small business accounting tips.