Accounting is a key element in a business’s financial backbone activities. The accounting process plays a vital role in managing financial transaction records. It also provides business owners and stakeholders reports about their income and expenditures.
Big companies whose volume of transactions is high take accounting activities as one of their priorities. Big companies with a big accounting team have many accountants of different levels. The force deals with a wide range of finance-related tasks to ensure monetary affairs are handled correctly.
Though small companies don’t have as many transactions as big firms, they still acknowledge the importance of accounting. However, there are fewer accountants to process accounting activities in small businesses. To help accountants in small businesses manage the accounting process in a less stressful way, we’ve compiled a 7-step accounting process guideline.
Why is accounting important to business?
Before we learn about the accounting process, let’s have a quick tour of why accounting is important to a business in so many ways.
Though accounting is a process of dealing with financial-related tasks, it is not just about monetary management. Accounting brings a lot to the table for business top tiers. Here, we’ll look at 5 benefits that any business owner can take advantage of with accounting.
Keeps your business organized
Accounting and business go hand in hand, like peanut butter and jelly. You can’t have one without the other. But why, you ask? Accounting lets you know how much money your business has earned and paid out.
Though small, your business still has quite a long list of customers and vendors. Which customers haven’t paid you? What debts haven’t you paid yet? You will want to collect payments from customers on scheduled dates and then pay out the debts to your vendors.
Yet, in reality, things aren’t as perfect as you wish. Sometimes, a customer will pay an invoice late, and their excuse sounds reasonable enough so that you can’t say “no.” However, in the meantime, you still need to process payments to your vendors as you want to maintain good relationships with them.
Accounting gives you a chance to revisit all your financial records. Based on that, you’ll know which customers you need to collect overdue payments from.
Helps evaluate a business’ performance
Financial records provide detailed statements that reflect a business’s health. With key information such as expenses, gross margin, and debt displayed on financial records, you know how the business is doing, whether it’s doing good or having a hard time. A good accounting system makes it easier to look back in the past and make comparisons.
Improves an organization’s decision-making
Business is never a game of luck, and every decision is made with great caution. Therefore, it’s almost impossible to make the right decisions without accurate information.
A good accounting system provides insights into a business’s performance and its trajectory. These insights help business owners, investors, and stakeholders make the right decisions for its future. Based on performance’s insight, you will soon execute new strategies to align with the condition of the business.
Companies also use analysis of financial reports to make decisions about hiring employees, making purchases, gifting charitable donations, and more. You may look for a strategic marketer to handle bigger projects, and you’re not sure if your budget can make a good offer for new talents. Or should you upgrade the software for office workers to improve their productivity? Well, all those questions can be answered if you look at the financial reports summarized by the accounting process.
Opens doors for getting investments or loans
Investors and lenders need to learn about your business before they decide to join hands with you. As a good negotiator, you make investors impressed by pointing out your business mission and vision. You also prove to them that your business has high financial potential.
Well, that’s half the way. Investors and lenders now have positive views about your business, and they will ask for evidence of your performance. You will have to show them your business’s financial statements and records. These statements and records will paint a clearer picture for investors and lenders. Besides, they prove that what you’ve represented is trustworthy. Without evidence of your business performance, you could hardly get a loan approved.
Allows you to stay within the law
Every business’s legal obligation is to pay tax, and any business owner wants the tax procedures to go as seamlessly as possible. Accountants have to handle the organization’s financial matters according to various laws and regulations.
Good accounting systems and processes will make everything much easier. Besides, they also ensure your business violates no obligations when it comes to money affairs.
7-Step Accounting Process
Business financial data, including sale transactions, payments to employees and suppliers, interest and tax payments, are all important. Therefore, they must be well-documented in the company accounting books.
Accountants use accounting principles to record and report business financial data. This accounting process contains 7 steps, with each being a base to build off the next step. Let’s have a look at the 7 steps of the accounting process.
1. Identify transactions
The first step of the cycle begins with the job of identifying transactions. There are numerous transactions made by companies with customers, suppliers, and even their employees. Every single piece of documents needs to be properly recorded on the company’s books so that accountants can collect and analyze them in the accounting process.
However, paper records are susceptible to risk. Risks such as incidents of fire, poor environmental conditions can ruin your piles of files. If your business office catches on fire, your paper records could go up in smoke. Floods, earthquakes, and other natural disasters can also result in the loss of important business documents. If records are stored in moisture-prone areas, they’re subject to mold. As a result, businesses will suffer from a huge loss because of missing documents or defaced bills.
An optimal solution is a piece of software that digitizes and stores all your important transactions on the cloud. Digitized files are much safer than paper files. Besides, they’re highly accessible. Accountants can search, filter, and collect a group of documents with just a few clicks.
Shoeboxed is a cloud-based software that helps businesses turn their massive paper receipts into digital data. You can get your receipts scanned, stored, and organized by your mobile app. It’s simple to install and easy to use.
2. Record transactions in a journal
The second step in the accounting process is to record every transaction in a journal. A journal, or a Book of Original Entry, keeps a historical account of all recordable transactions with which the company has engaged.
Different accounting methods will dictate different official recorded times for each transaction. Cash accounting method records a transaction only when cash is either received or paid. On the other hand, under accrual method, transactions are recorded when they are incurred rather than awaiting payment. This means a purchase or expense is recorded as a transaction even though the funds are not received, or bills are not paid immediately.
3. Post to the ledgers
After journal entries are made, the next step in the accounting cycle is to post the Journal entries into the ledger. A ledger, also known as Books of Final Entry, consists of all accounts connected with the company.
The ledger breaks down all accounting activities by account and illustrates them in debit and credit columns. The balance of each account is represented at the bottom after all debit and credit transactions have been calculated. Accountants use ledgers to monitor financial positions and statuses by account.
4. Prepare unadjusted trial balance
The 4th step in the accounting process is to prepare the unadjusted trial balance. The unadjusted trial balance is the listing of all the business accounts that should be calculated at the end of a reporting period. This must be processed before any adjusting entries are made to the balances to create financial statements.
5. Adjust trial balance
The adjusted trial balance is prepared to show updated balances after adjusting entries have been made. This is the 5th step in the accounting process. This trial balance is an important step because it helps identify any errors throughout the previous steps in the cycle.
The adjusted trial balance ensures that either errors made by computers or transactions unintentionally skipped by accountants have been corrected and updated. For example, when accrual accounting is followed, transactions may have been incurred but are not booked in the Journal. They won’t be recorded until the end of the year, such as entries of expenses. Therefore, sometimes errors can happen if accountants miss a single record.
6. Create financial statements
Following the adjusted trial balance is the step of creating a financial statement. Financial statements such as income statements, balance sheets, cash flow statements, and sometimes statements of changes in equity will be generated.
Financial statements summarize all transactions and accounting activities during the accounting process, thus helping business owners know the actual financial position and the profitability position.
7. Close the books
Finally, a company ends the accounting process by closing its books on the specified closing date. A report for analysis of performance will be made to help companies improve their performance. This will have a great impact on the company’s future decisions. After closing, an accounting cycle restarts with a new reporting period.
The accounting process is important for every business’s sake. Because without it, you will not know your business’s actual position and performance.
However, accounting is a labor-intensive process that involves many tedious tasks. Many accountants say that the accounting workload is overwhelming, and it stresses them out. To reduce the workload of accountants in the accounting process, many business owners have reached out for accounting software as a solution. Computerized accounting programs now do many different things to make business operations and financial reporting more efficient.
Shoeboxed is an online app that lets business scan paper receipts and store them on the cloud. With the help of software, accountants no longer have to identify transactions manually. Start your trial today with Shoeboxed!