Accounting might not be the most exciting topic, but it’s an essential part of any business. It provides insights into your company’s strengths, weaknesses, opportunities, and threats in a competitive landscape.
The accounting cycle takes raw information about your company’s transactions and turns them into accurate financial reports. The basic steps include: collecting information from bank statements, receipts, checks that haven’t cleared, credit card statements, and more.
Financial Statements
Financial statements provide a snapshot of a company’s finances at a certain point in time. They include all the assets that a company owns, its liabilities, and its shareholder equity. This information allows investors and creditors to see a firm’s stability and long-term potential. It also shows how well the company is managing its assets. These reports are vital for all businesses, including privately owned companies and publicly traded firms.
The most common business accounting reports are the income statement, balance sheet, and cash flow statement. These four key documents are crucial for making informed decisions about your business. They are used by both internal stakeholders (e.g., managers and employees) and external stakeholders (e.g., investors and lenders).
Each of these statements is based on an equation: Assets equal Liabilities + Shareholders’ Equity. The income statement reveals a company’s profitability by combining revenues and expenses. The balance sheet shows a company’s position at a specific moment in time, while the cash flow statement chronicles the cash inflows and outflows of a company over some time.
The preparation of these statements requires a high level of skill and attention. Many small businesses turn to an accountant or bookkeeper to manage their accounting needs. These professionals can help them organize their financial data and prepare these statements for their use and their investors or lenders.
Taxes
As the old saying goes, “Nothing is certain except death and taxes.” Taxes are mandatory contributions collected by governments to finance government activities like roads, schools, and social programs. Taxes are also a major source of revenue for businesses, and companies must carefully manage their financial and accounting decisions to avoid penalties.
Tax accounting involves the collection, processing, and analysis of data to determine a company’s tax liability. It differs from management accounting, which focuses on internal operations and decision-making. Tax accounting is a specialized field, and it has a profound impact on a company’s financial statements.
For an individual taxpayer, tax accounting focuses on income, qualifying deductions, and investment gains or losses. This type of accounting requires the use of a tax accountant, which is different from general accounting.
The tax accounting landscape is changing rapidly. Increasingly complex reporting requirements, changing global tax policies, and tighter deadlines for period-end closing are challenging the accounting industry to change its processes and meet new challenges. As the results of the EY 2023 Tax Accounting Executives Survey show, companies must accelerate their efforts to transform their tax accounting functions and improve efficiency. This is a key area of focus for the industry, and data, analytics, and automation tools are playing an important role. The EY Survey highlights several ways that companies are using these technologies to increase accuracy and drive efficiencies in their tax accounting functions.
Payroll
Payroll is a crucial function for businesses of all sizes. One misstep can result in a range of issues from unhappy employees to costly fines and penalties. To help manage payroll accounting and keep up with laws and regulations, it is important to use an accounting software program that provides a clear and organized way to document transactions.
Payroll accounting includes a wide array of tasks that must be performed regularly, including calculating employee earnings; preparing and distributing checks or direct deposits; withholding taxes and deductions from employee paychecks; reporting and paying taxes to federal, state, and local authorities; and maintaining accurate records and compliance with labor laws. Many of these tasks are complex and time-consuming, and it is crucial to have a quality accounting program that can simplify the process.
The first step in payroll accounting is determining an employee’s gross pay, which involves evaluating their hourly rate or salary and factoring in additional compensation components such as overtime, bonuses, commissions, allowances, or other perks. Once this is established, the next steps include adjusting the account balances to reflect the correct amounts paid to each employee, as well as any accrued payroll liabilities (which are not yet paid to employees). Lastly, the company must record all of these transactions in its general ledger and payroll accounts.
Reporting
Essentially, reporting is about simplifying data in a way that can be used by specific target groups and stakeholders. The goal is to create a clear and accessible overview of the company’s financial state that can be understood by these audiences. Accounting teams can use these reports to make decisions about investments and operational changes. They can also compare performance to other similar businesses or industry benchmarks to identify areas for improvement and growth opportunities.
The most common accounting reports include balance sheets, statements of cash flow, and profit and loss statements. These are created according to generally accepted accounting principles (GAAP) and can be presented to shareholders, lenders, or insurers. Many companies generate custom versions of these standard reports to meet their specific needs and preferences.
Other important accounting reports include the statement of shareholder equity, which outlines changes in ownership over a specified period. This report includes proceeds from new shares issued, dividends paid, and other activities. It can be an invaluable tool for private, non-public companies with a small number of investors and owners.
Other key accounting reports include revenue and expense summary reports, profit and loss forecasts, and invoice summary reports. These reports provide valuable insights into current and expected business income, allowing accounting teams to identify and adapt their estimating and billing strategies to match customer demands and ensure profitability.
