Accounting For Small Businesses

What do we have in mind, when talking about big corporations in terms of governmental regulations and the use of accounting policies and practices? Of course regulations are heavier and stricter. Regulatory bodies like the Securities and Exchange Commission and Internal Revenue Service have oversight functions over corporate bodies that there is more interference on the part of the government. In some territories the SEC may even have quasi-judicial functions, resolving intra-corporate disputes and controversies.

With the passage of the Sarbanes-Oxley Act in 2002 that lead to the creation of PCAOB or the Public Company Accounting Oversight Board, accounting standards have been more stringent. Companies are now obliged to report on the efficacy of their internal control procedures in obtaining their varied objectives. They were also required to make detailed disclosures based on the generally accepted accounting principles. Because of the nature of corporations, their accounting demands also are gargantuan. In a corporate set-up, there might be a dozen of divisions, segments and business units. The challenge is how to consolidate the financial performance of these sub-entities to come up with a consolidated statement of income. Big businesses like that of corporations necessitates centralized, more structured and well-defined accounting system.

On the other hand, directly opposite these mammoth corporations are small business, with capital ranging from a few hundred bucks to not more than 50,000 dollars, and usually taking the form sole proprietorship. These businesses usually are owned by a single individual or few individuals without really formalizing their agreement to form a legal partnership. As such, the capital is mainly coming from the owner. The proprietor also normally does multi-tasking, wearing different hats at the same time. Because the business is small, the demands are also small, regulation and accounting wise. They are not the usual subject of scrutiny of governmental watchdogs. Of course the lean size of the business should not undermine the accuracy and completeness of accounting records. This matter transcends to all business entities regardless of the size. As a matter of fact, while the business is small, things must be set right and proper so it would be much easy to expand in the future.

Cost cutting is usually the strategy of small business. Sometimes, these measures would even impair the need of an accounting system that generates records and transactions. Owners of small business may have the tendency of not focusing on accounting concerns because it does not produce direct results on business. However, many good managers and finance people would recommend that a system, whether manual, or automated or a transition of both must be put in place.

Manual accounting is a form of accounting system that does not use accounting software or uses software but does not automatically process transactions. This is usually found in small businesses that maintain the physical book of accounts like journals and ledgers. All or almost all of the steps in the entire accounting cycle are done with lay hands. Starting from entering transactions in journal, summarizing them by posting in the ledger, preparation of trial balance, adjusting entries, up to the generation of financial statements and supporting notes; all these are manually done. These companies have accounting system, only, it’s manual. The main reason why companies still embrace manual accounting system is obviously pecuniary in nature. The company might still be in the start-up stage or perhaps it has small number of transactions and these transactions are just routinary. Although of course, this cuts cost, the main criticism that could be leveled against this set-up is it requires a lot of dirty work and space for maintenance of physical documents and records. As much as some companies would like to have a fully automated accounting system, their resources would not permit. In the process, they resort to a manual one.

Acquiring integrated systems through Enterprise Resource Planning (ERP) producing a totally paperless environment would prove untenable also for small business. A paperless environment, where transactions are automatically initiated, entries automatically generated and master files are automatically updated is an attribute of a fully automated accounting system. Reports are also generated with little or no human intervention at all. Moreover, these reports could be customized based on the specific need of the user. This would entail tremendous volume of resources, however. For purposes of economy, small businesses usually settle for an interface or commingling of both manual and fully automated systems, meeting half-way as they say. Although data are still inputted manually from source, productivity tools are employed to make the whole process faster and more efficient. Say, the system has the capacity to group together similar accounts into one. Instead of manually calculating the balance of say, Cash account, the system does the automatic posting for you. From raw transactions in a period, trial balances can be made available, so as with the financial statements to wit, Balance Sheet, Income Statement, Cash Flows and Changes in Equity. This capacity is way below fully automated systems but is more efficient compared to manual accounting.

To conclude, the business has to make a rather important choice whether to adopt an automated or settle to manual accounting system. It has to make an honest review of itself and check its capacity to shift. At the end of the day, what is more important boils back to the accuracy, reliability and completeness of accounting records and reports.

Mark is a financial writer, small business owner, and owner of a Canadian business for sale website. Visit the site today if you are looking to buy a business for sale Calgary, or in toronto.