Guest Post by Joyce Del Rosario
Accountancy tends to be a difficult subject for even the savviest of business owners. This is why most small business owners, solo practitioners and even freelancers choose to hire an accountant to manage their finances, which is undoubtedly a good thing.
But, even if you do have an accountant to deal with pesky things like spreadsheets and progress reports, there are a few aspects of your business that you should be familiar with yourself, and understanding terms like income, expenses, assets, liabilities and equity or net worth is crucial if you want to succeed in any industry.
Too many business professionals choose to bury their head in the sand and leave the vague financial stuff for their accountants to deal with. However, no matter how good your financial advisor is, nothing takes the place of being financially literate yourself.
Here are some of the most common myths about accountancy that may be holding you back from being truly successful.
You have to be good at math to understand accounting
This is by far the most common myth about accounting and it is also the main reason that people tend to shy away from accountancy.
Of course, accountants do use math, but so do most other professions and everyone from an engineer to a salesman must have a grasp on numbers if they want their career to go anywhere.
Accounting is more about analytics and research than algebra, and you don’t have to be a mathematician to understand basic accounting principles.
It does involve some basic math like addition, subtraction, multiplication, division and the occasional formula, but you’d be hard pressed to find an accountant who does any of this without a calculator.
The bulk of accounting involves analyzing numbers in order to see what they mean for the current and future financial state of a person or company.
A tax preparer is the same as an accountant
If you think the guy preparing your taxes is the same as an accountant it could have negative repercussions for your business. While most accountants will do taxes as well, most bookkeepers and tax preparers will not maintain your accounts and give you the same financial advice that an accountant could.
Their qualifications are very different from those of an accountant, and confusing the two could cause serious problems down the line. So, just for the record, an accountant is someone who holds a degree in accounting, and nothing else will do when it comes to the future of your business.
Accounting isn’t necessary for small businesses
This is one myth that can have dire consequences for any small business. Many small business owners assume that hiring an accountant is something that only larger companies need to do.
However, thinking you can go without accounting is the same as thinking you don’t need a budget; don’t need to know what your financial state will be like in the future or have no need for any tax advantages.
No matter how small your business is, you need an accountant. You simply cannot run your business properly without knowing the state of your finances or whether or not you will report a loss at the end of the year to reduce your taxes. You also need to know about areas that you are doing poorly in and need to improve in, or your business will continue on a downward spiral.
It’s fine to pay business expenses out-of-pocket
This is a big misconception and can cause you to waste a lot of money. Your business needs its own business bank account and expenses should not be paid out of your own personal account.
Any business expenses that you have paid for from your personal reserve or salary must be noted down accordingly and careful records must be kept. In most cases, any money that you spend out of pocket for your business can be returned to you tax-free.
Without a proper business bank account, you have no way to tell whether or not your business is actually making a profit. All revenues should be paid into the business bank account and all business expenses should be paid from this same account. If you come up short, you can pay out-of-pocket, but you must take care to keep proper records so that you can get that money back.
If you are making a salary, that salary should not be paid into your business account, because it is taxable, which means you may be paying far more on taxes than you should be. Keeping your finances separate can make a huge difference.
You tell how successful your business is without accounting reports
Looks can be deceiving, and just because your business is bustling every single work day does not mean that it is doing well or making a profit. Without accounting reports, you have no way of knowing if your prices are right and whether you need to cut costs in any particular area.
Many business owners think they can focus on the practical side of the business, like keeping customers happy and getting return business, without paying attention to things like costs incurred, waste or loss. But operating in this way means that a potentially successful business can fail before it has even been given a fair chance.
Accounting reports show you where you can save money, which areas are in need of a cleanup and how things can run more efficiently as a whole in order to make the most profit possible.
Author: Joyce Del Rosario is part of the team behind Open Colleges. It is one of Australia’s pioneer and leading providers of Accounting Courses and Bookkeeping Courses. When not working, Joyce enjoys blogging about health and finance.