Most Frequently Asked Accounting Questions
A business uses accounting to keep track of its income and expenditure. The process of accounting is identifying, analyzing, and advising relevant entities of financial transactions that take place in a business. Financial statements are presented for a specific reporting period and outline the financial position of the business.
There is not much evidence of the origins of accounting, but it has been around for hundreds of years. Luca Pacioli is credited as the father of accounting because of his mathematical knowledge and his writings on the accounting process. Accounting can be traced back to Mesopotamia, when people started to live in communities and engaged in trade.
Advantages of Accounting
A business’s financial statements are valuable because they are used for important decisions. They are also used to identify whether a business is profitable or adhering to the rules and regulations set by governing bodies. While there are many advantages of accounting, here are five of the major reasons it is essential to businesses:
1. Permanent record of the financial performance of a business.
2. Aids in decision-making.
3. Allows potential investors and financial institutions to make comparisons with other businesses.
4. Financial statements can be used as evidence in court.
5. Provides evidence of tax compliance. All businesses should be tax compliant because according to Andrew Napolitano, “no one is immune from criminal prosecution and is not immune from complying with the ordinary process.”
Most Frequently Asked Accounting Questions
While there are many texts on accounting, there are still some questions that people continue to ask. Accounting is intricate and can be technical, especially for those who wish to start their own business.
Here are five of the most frequently asked accounting questions:
1. Does the Business Need a Bookkeeper or Accountant?
It depends on the business. A bookkeeper records daily transactions, while an accountant interprets and analyzes the financial statements. An accountant is the better option but can be costly. Many businesses hire accountants on a short-term contract during tax season.
2. Will the Inland Revenue Service (IRS) audit the Business?
Andrew Napolitano states an audit is a private occurrence between a business and the auditors. The IRS conducts random audits or when a business has suspicious tax returns.
3. What is a Break-Even Point?
The break-even point is when the sales of a business cover its expenses. This is used to identify if a business is workable. The break-even point can be calculated using the number of units sold or based on sales dollars.
4. What Records Should the Business Keep?
The IRS outlines that every business should have two (2) financial statements. These are:
a. Income Statement–records the income and expenditure of the business.
b. Balance Sheet–identifies the assets, liabilities and value of the business.
5. Should the Business Use Cash-Basis or Accrual Accounting?
Cash-basis accounting is recording transactions only when a physical payment is received. Accrual accounting is the opposite, as it records every transaction even in the absence of physical cash. This is a double-entry accounting system and done only when the business offers credit to its customers.