What is Accounting? Why do I need it for my business?

The American Institute of Certified Public Accountants (AICPA) defines accounting as “the art of (1) recording, (2) classifying, and (3) summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and (4) interpreting the results thereof.

Many businesses; especially small and medium sized businesses; only use accounting to comply with regulatory requirements such as filing their annual income taxes. But is it only the reason why we should have accounting records? Though I understand why most businesses don’t fully utilize their accounting (e.g. lack of resources such as business is owner managed and doesn’t have enough time); I think this is a waste of a potential powerful tool to help the business grow.  If properly executed, accounting records and financial reports can be use to make more intelligent decisions.

With sports, we keep scores and statistics (even statistics for each player) to monitor the progress of the team including each player.  We even listen to sports analyst which dig in into those scores and statistics then analyze what happened or changed (e.g. if a star player was injured resulting to lesser than expected team performance).  Then based on that analysis, the sports analyst will provide a prediction on how the team will perform for the rest of the season.  By doing this, we as sports fans learned how to monitor, gauge, and even predict how our favorite team will do.  If we do this with sports, why don’t we do the same in our business?

Following the analogy above and the AICPA definition; below is a comparison of the accounting process and sports.

ProcessBusinessSports
RecordingDaily transactions such as sales and expensesEach games’ score, each player’s statistics like assist and points
ClassifyingCategorize each transaction to ledgers such as types of expenses whether payroll, rent, utilities, etc.Categorize each player’s statistics like if it an assist, pass, three-points, etc. (for basketball as example)
SummarizePreparing financial statements such as balance sheet and income statementsSummarizing total team’s points for each game and summarizing player’s statistics during his career
InterpretingUsing accounting records and financial statements; we can prepare various analysis the business needs such as what product provides the highest margin or what is the biggest expense the company is incurringBased on game results, sports analyst can provide an in-depth insight on how the team and each player performed and how they think they will perform.

We as business owners and managers should be like the “team coach”, we know our business, how it is doing on a daily basis.  But like a coach, we should also study “scores and statistics”, we should use available information, listen to sports analyst so we can immediately act and have an informed decision.

You may ask, so do I need a bookkeeper or accountant?  And what is the difference?

The term accountant is synonymously used with bookkeeper by most people.  For simplicity, I will refer to bookkeeper as those professionals who can do 1 to 3 of the accounting processes as described above.  Most bookkeepers, doesn’t have the adequate training, experience and competency to perform an interpretation on the financial records.  This is where accountant; particularly CPAs; plays a vital role.  Just like a sports analyst, accountants don’t just know how to record, classify and summarize financial information, they know how to interpret the result.  Accountants can help you with various analysis that will help you focus the limited resources of your business in order to achieve the optimal result.

To summarize; what you and your business needs depends on what your business goals are and your knowledge on how to achieve those.  I hope this article had opened the mind for some with regards to the potential use of accounting records which are basically available to you. If you need assistance in accounting or want to consult an accountant, contact us at www.bridgingnumbers.ca/contact-us