How to Choose Business Accounting Software
Elizabeth Wasserman writes an informative piece on inc.com- ” How to Choose Business Accounting Software.” The piece summarises the questions a small business owner/entrepreneur should ask when deciding on a what accounting software to buy.
Fooling accounting
Jennifer Hughes writes an interesting piece in the Financial Times (London) which reminds us of one of the basic concepts of the accounting world – “true and fair view”. The recent investigation into Lehman Brothers revealed how $49billion had been “moved off” the balance sheet in 2008, a move which was supported by the now defunct banks’s directors. And we don’t have to look as far away as the US – what about Anglo Irish Bank moving (was it) €6billion in to and out of its deposits at year end to make things look nice. And, as Hughes says, this kind of thing has happened before – she cites the case of London & County Securities back in 1973, who were up to the same sort of shenannigans as Anglo Irish.
Can we stop this kind of tom-foolery in accounting? Maybe not completely, but as Hughes says, a global set of accounting standards might help. Let’s wait and see.
Accountants as translators
I had a guest speaker at one of my lectures recently. The talk was about accounting software, but during her presentation the speaker mentioned that accountants should be translators for their clients – especially to new small business clients who may not have much knowledge of accounting terms. This made me think about the role a good accountant should work link a language translator with clients. One of the key functions of accounting is to communicate information. But what happens when the language used to communicate is too complex to be understood without translation? Personally, I can speak both English and German quite well. While learning and using German I know that some things just don’t readily translate. On top of this, my German is not fully fluent, so I sometimes need to ask the speaker to slow down or use simpler words. Now think about what a small business owner or up-and-coming entrepreneur knows about the language of accounting. Let’s assume nothing, but they know things like how much money comes from sales, they have a pile of receipts in a drawer somewhere, they have an office computer, owe some suppliers and have invested a lump-sum in the business. To accountants these are:
| Business owner’s term | Accountant’s term |
| Money from sales | Turnover/Revenue |
| Receipts in a drawer | Expenditure |
| Computer in office | Non-current (fixed) asset |
| Money owed to suppliers | Liability -trade payables |
| Lump sum put in business | Capital/Equity |
So some advice to the accountant’s out there – be a translator if you need to be. Translate your jargon into understandable language for the business owner – especially new business ventures. Over time, both accountant and business owner will start to understand each others language.
Accounting and Innovation
Innovation is the life-blood of any business. New products, services and ways of doing business all lead to sustainable longer-term profits. Sometimes innovation comes at a substantial cost, for example in research and development costs. In these recessionary times, budgets for things like product research and development are often slashed. Of course accountants are blamed for this. But can accountants play a role in injecting innovation into businesses in these tough times. According to Richard Young, writing in Financial Management (September, 2009), accountants can inject a dose of realism in to innovative ideas and projects. They can be a ‘wet blanket’, which although has a negative tone, may actually be exactly what is needed in lean times. With a smaller pot of money to be spent on product innovation, accountants can help determine the longer-term profitability of new products or services, preventing great ideas becoming poor sellers. Accountants also bring structure, based on their expertise of the many business processes involved in getting innovative ideas afloat. For example, accountants can ensure that the costs of any new product are minimised – production costs, marketing and distribution costs etc. They can thus help take the innovation to something which is based on costs and profits, something which investors and managers readily understand. Innovative and creative people are often uncomfortable with such language.
Accounting rules in smaller companies
Limited companies must prepare financial statement in accordance with accounting standards and Company Law. As you can imagine, complicated rules and laws are often way too much for a small company to deal with. Most to the time, directors of small companies leave the work of preparing financial statement up to practicing accountants. In fact, in the UK and Ireland, small companies are also exempt from the requirement to have their financial statements audited provided they meet certain conditions.
In June 2008, the UK’s Accounting Standards Board (ASB) issue an accounting standard specifically designed to cater for and simplify the accounting rule for small companies. What constitutes a small company is specified by Company Law. In the UK, any company with turnover of not more than £5.6m, a balance sheet total of not more than £2.8m and has less than 50 employees is a small company. If a business meets these criteria, it can then adopt the ASB’s Financial Reporting Standard for Small Entities (FRRSE). This standard is very useful in that it incorporates all requirements relating to financial statements as set out in Company Law. Thus, by following this standard in the preparation of its accounts, a company is also fully compliant with the law. The FRRSE covers many areas of financial statements- for example: the profit and loss account, fixed assets, current assets, the Directors Report and much more. It also exempts smaller companies from some more complex requirements of other accounting standards. If your business is a small company, it might be worth while asking your accountant if the FRRSE is suitable for you. It might simplify their work, and as a result save you some fees.
Here is a link to the ASB’s website, where you can download the FRRSE for free;
http://www.frc.org.uk/documents/pagemanager/asb/FRSSE/FRSSE%20Web%20optimized%20FINAL.pdf
Accounting and HR
In the July 2009 (July 30th) edition of People Management, the journal of the Chartered Institute of Personnel and Development (CIPD), Claire Warren provides an example of the importance of accounting information to HR professionals. The article touts the often cited expression ‘people are our greatest asset’, but questions how many HR professionals appreciate the full costs of people in an organisation.
According to Vanessa Robinson of the CIPD, HR professions shouldn’t ‘merely say “people are our greatest asset”, but look at the profit and loss account and see what they cost!’ The problem is that many HR professionals may not have sufficient basic accounting knowledge to understand basic accounting principles. They need to be familiar with the basic financial statements – the profit and loss account (income statement), balance sheet and cash flow statement. What this article tells us is something we as accountants already know – that accounting is a communication medium, a language indeed, that not everyone understands. Having said that, while HR professionals may not think they require fluency in accounting, they do need to make business decisions which are underpinned by sound financial information. Having an understanding of accounting information (rather than just accepting it from the accountants) will benefit HR and other professionals in an organisation. The article in People Management is a great start for anyone who wants to know the basics, so take a few minutes to read it.
The basics of double-entry accounting.
The double-entry system of accounting is used to records business transactions. No matter how simple or complex the transaction, it is recorded in ledger accounts with a debit and credit entry. The rules are double-entry accounting are incorporated into all accounting software, even if you don’t see them!
The double-entry accountin system ensures the integrity of business transactions and their financial values. It does this by ensuring that each individual transaction is recorded in at least two different ledger accounts and so implementing a double checking system for every transaction. It does this by first identifying values as either a Debit or a Credit value. A Debit value will always be recorded on the debit side (left hand side) of a ledger account and the credit value will be recorded on the credit side (right hand side) of a ledger account. A ledger has both a Debit (left) side and a Credit (right) side. If the values on the debit side are greater than the value of the credit side of the nominal ledger then that nominal ledger is said to have a debit balance and vice versa.
Luca Pacioli, an Italian monk, was the first to document the system in a mathematics textbook of 1494. Pacioli is often called the “father of accounting” because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it
Click on this link for a brief animated tutorial I have put together to explain the workings of double-entry.
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