Using an accounting software does not replace the accountant.
Small businesses owners, especially those that have just started their business think that software is all they need to manage their financials correctly. Why even bother hiring an accountant or bookkeeper when you can save money, right?
Then one day you receive a letter from the IRS requesting for your balance sheet information such as asset depreciation, owner’s draw, or perhaps they want to inquire about a tax deduction you took as “political contributions”. Yep, have fun with that.
Things to consider before doing your own accounting:
1. Expenses. Not everything is a business expense. Your loan repayments for auto, business mortgage or credit card payments are not business expenses and should not be registered the same way you would register inventory or office supplies. Loan repayments, along with personal expenses are recorded on the balance sheet.
2. Balance sheet. What in the world is a balance sheet? This is the place where you register everything your business OWNS and everything your business OWES (bills, loans, taxes, etc), plus personal expenses and personal withdraws you make from your business account. This information is used to complete a business tax return, and or by bankers when you need a loan.
3. Sales Tax. Paying sales taxes is not an expense because you are basically “collecting” sales taxes from the consumer (your customers or clients) and turning it over to the government. Sales tax is NOT a tax on your sales!
4. Tax Planning. Your accounting software will not give you tax advise based on your current financial circumstances. What if you’re a sole proprietor and you need to convert to an S-Corporation in order to save taxes? Or perhaps you need to pay someone and you need to decide between a w-2 employee versus an independent contractor. Having the input of an accountant is never a bad idea.
5. Owner’s equity. Is the money you put IN and the money you take OUT of your business. Keeping track of both things will help calculate your “net worth”. It’s important to keep track of these figures for banking and tax purposes.
So, are you ready to take on your own accounting? Consider hiring an accountant that is willing to train you to use your accounting software and you can do most of your accounting. For the tricky and most technical transactions you can have your accountant step in plus review the rest of your work. This is an affordable way of keeping your accounting records secure. Check out our previous 5 tips on hiring an accounting professional.