Accounting basics for small businesses

Learn the basics to create a working partnership with your accountant

Accounting is a big part of the legal requirement as a business owner. It is a huge sink of time and money just to provide more paperwork to various bureaucratic entities. Or is it? Accountants see it as a way to pilot a company in a virtuous way to provide the best environment for the business to grow. By learning the basics, you can get a better understanding that will transform any opposing force into a driving force of a great partnership.

You might think that you can have everything in mind. Even if upcoming expenses and upcoming revenues are in good balance, the cash flow could be a problem. It would be hard to mentally keep track of everything, and writing things down greatly eliminates that risk. Accountants know that their customers might have the best entrepreneurial spirit, but they also know that the business will not survive if the numbers are not right. Money is the lifeblood of the company.

Moreover, in case of accident, the company can continue to operate, at least for a limited time.

By getting an understanding of the basics of accounting, you can save on your accountant’s time, and get more value out of it. Let’s get started.

Focus on the core business

Learn the cases that make up 90% of the business, leave the rest to the accountant. Accounting requires a lot of time, and regulations always change. The goal is not to remove the accountant, but to get him to supervise and review the books.

Check that the invoice layout follows the legal requirements, and that the invoice number is unique. There are a few mentions that are required in all cases (like the company’s VAT number), and some that are required in specific cases. Make sure to go over the different cases with the accountant.

Get an idea of the Chart of Account

Usually, the chart of account should be designed by the accountant. Some of the questions that drive its design depend on the business model, the detail level that is needed, what parts need to be tracked, etc.

Get the basics sales and purchase encoded with the correct account. For anything that deviates from the norm, ask the accountant.

Basics of tax handling

Once you figure out the main purchase and sales, the taxes will follow the same template.

Tax grids

The rate is not the only thing that matters (actually we should say computation, as various taxes can be computed with algorithms that are way more complicated than a simple percentage). Taxes are also categorized by a grid, which is basically a sets of codes that will be used to aggregate the taxes. This is purely for reporting to the state, but this is important to get right, as fines can be quite high.

The fiscal positions of your business

In the EU, there are 2 cases, B2C and B2B. The B2C is straightforward, VAT is included in price and the business has to pay it back to the state. The B2B is divided in 3 cases: 1) national B2B sales, where VAT is handled in the typical way 2) intra-community B2B sales, where VAT should be omitted; the invoice bears a mention, and the customer will write it off in self-liquidation 3) extra community sales, sales tax is set to 0%

As a buyer in case (3), it is important to properly encode the purchase, as it will impact the proper tax codes. The codes should compensate for each other, but it is still a costly mistake to not encode it. (In particular, this might participate in the computation of certain financial thresholds, whereas 0% would not.)

So in the general case, there should be a tax mapping depending on the fiscal position of the transaction.

Note that there might be other fiscal positions depending on the country, type of relationship between the companies, type of services provided, and so on.

Get an idea of deductible expenses

Normally, you use the company bank account for all company expenses, and only those. However, if going to a restaurant with a business partner is an acceptable expense, going to a restaurant a Saturday night usually isn’t. The person in charge of the control is likely to find it suspicious. Moreover, there are limits in the amounts to qualify as a deductible expense.

Get an idea of amortization schemes

Generally, small equipment can be marked as an expense, while big equipment should be amortized over a few years. Moreover, the first year should be prorated depending on the date of acquisition. The limit should be around 250€, but it should be checked with the accountant.

Anticipate legal deadlines

The accountant is always busy just before the deadlines, as many clients do not provide their documents until the last minute. This augments the risk of errors. Mark the big deadlines on your calendar, and anticipate the accountant’s needs.

Get value from your accountant

A good accountant is always keeping up with the changes in regulation, and can provide a lot of value in terms of tax optimization.

Subsidies and Tax Schemes

Europe, the country or the legal department regularly provide subsidies or tax schemes to help companies grow. In many cases these need to introduce a complex application process, and require a finer (analytic) accounting. With a clear view of the numbers, your accountant can easily determine to which ones you are eligible, how much they might worth, and the risks associated.

Present the numbers in the most appealing way

There are different approaches to encoding. Within the set of Generally Accepted Accounting Principles (GAAP) that are used in most cases, there are different approaches that might be better suited to specific cases.

Furthermore, the accountant is likely to know by experience how to present the report itself to different audiences. This includes what layout to use, what to highlight, etc.

Pivotal decisions

When making important structural changes, the accountant can provide a lot of insight. Setting up sub-companies, changing the legal form, can make a big difference, and once again they will have a lot of experience in these matters.

Software

You should choose a software solution that gives access to both you and the accountant. Ideally, you have transparent access to your data, a way to restrict the security to only the necessary parts, and ways to easily integrate the data in other systems. The software should support all aspects of the company and be a help in following the legal requirements, rather than a hindrance.

Conclusion

Taking responsibility for the accounting is something that a lot of companies miss out on, even some of considerable size. Understanding these points is a tool to be two steps ahead.

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