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ACCOUNTING

PUTTING UP A SMALL BUSINESS


Review of Related Literature
In an article “Easy Accounting Tips for Small Businesses” written by Allan
Branch determines that his article containing tips are helpful not only to accountants but also
to businessmen. They can learn more about what their business needs to improve with regards
to accounting. The first tip that he mention is the “KISS (Keep It Simple Starting out)” which
is related to sole proprietorship; a simplest form of entity and this form of ownership requires
NO special communication or filings to Internal Revenue Service until you have employees to
work for you.
“Over 90% of small businesses fail or change ownership within the first five years.
Plan your business to thrive but if it fails under a sole proprietor you simply stop doing
business.”, he added. People know that failure is a part of success, not until failures continue
to arise. People do business to earn profit and definitely not to face bankruptcy.
Branch stated a lot of tips and this is how he ended “After you pass the five-year
hurdle, then you can talk with a CPA about another entity type that might save you taxes.
Again a simple bookkeeping entry transfers all of the business assets from the sole
proprietorship into the new entity without any tax penalties. Then quit your day job to
celebrate your new livelihood.”
Just like big enterprises and multimillion companies, SMEs also strive to boost their
profitability. As a head start, an entity should carefully monitor the accounting practices it
employs. The accounting process plays a vital role in order for the company to manage its
finances. Measuring its net profit needs to be done in a fair way to help assess the firm’s
financial performance in accordance with the relevant standards.
According to Cooley and Edwards (1983), owners of SMEs consider profit
maximization as the most important financial objective. This has led to the argument that
SME owners pay attention to profitability and measurement of net profit when they evaluate
their firm’s performance.
According to (Pratheempkanth, 2011), in order for a company to increase its financial
performance with regard to capital structure the company should identify the weaknesses of an
investment because it is the indicator on which the management should take decisions. In
relation with this study the management of the food stalls should be wise in all the
investments that they have. As the saying goes “the higher the risk the higher the return”, it
simply means that there is no investment that is completely secured, all investments have their
own weaknesses and it is the company management’s task to identify the investment whether
it is strong or weak and after that make the necessary actions for the investment to have a
good effect to the company.
(Pandian &Narendran, 2015) states that “To improve the financial stability of a
company proper mixture of stake in the business between the owners and the creditors have to
be made in which significant pressure on future cash flow can be avoid”. In relation with this
study, owners tend to rely on the creditors in raising their capital for a business, the interest or
stake of the owners and creditors should be made proportionately for them to have a
harmonious relationship. If the owners and creditors will have a misunderstanding within the
business, then it may cause pressure on the flow of cash in the business and will result to a
low progress in the financial aspect of the company.
“Performance standards should be established and communicated to the investors”
(Pratheempkanth, 2011). A company aims for a daily progress with regard to its financial
performance. And a factor contributing to the progress of a company are investments, the
company should have high investment standards for them to have a high rate of return. This
will also trigger the company to make wise investment decisions because the standard for an
investment is high so it will follow that the decisions of the company should be high for it to
complement with the standards and ro have a massive effect on the progress of the financial
performance of the company.
In an article entitled “Disadvantages of Small Scaled Business”, writer Neil
Kokumuller cited the following; First, “Small companies don't typically have the name
recognition of larger businesses that gain exposure through more locations and promotional
efforts. Less visibility in the daily lives of people makes it more challenging for small
businesses to attract traffic. They have to work to develop a company image and reputation
from scratch, whereas a large chain enjoys an established reputation.”, second “Budget
constraints are a significant small business hurdle. Small businesses don't have the funds to
put into research and development, advanced technology, marketing and promotions and high-
end inventory. All of these elements impact a company's ability to develop, acquire and offer a
high quality solution to customers. Small companies sometimes have ad budgets of $5,000 to
$10,000, which won't even get a television commercial produced in many cities.”, third,
“Bargaining power inhibits a small company's ability to get a low cost basis of resale
products. Typically, large companies can negotiate volume discounts and bulk pricing that
reduce their cost per unit. A single store doesn't have the same buying power as a company
with hundreds of locations and economies of scale.”, Forth “Because of the bargaining power
deficit and other cost structure disadvantages, small businesses don't often compete on price
against larger competitors. They simply can't make enough money with a low price strategy
and must opt for differentiation in products or services. This increases the burden on a small
business to promote the strengths of its products and services, which can place stress on its
smaller budget.”
In an article “The importance of entrepreneurship in small businesses” determines that
Small businesses are vital to the success of the economy. Not only as they provide the success
stories of the future, but also because they meet local needs. They also serve the requirements
of larger businesses for example photography services, printed stationery, catering and routine
maintenance.
There are various benefits that small businesses can offer. It can develop personal
relationship. With a small business you know who you are dealing with; you can 'put a face' to
the person you are in contact with. Person-to-person interaction is as important as ever in
building strong relationships. Small businesses will also respond flexibly to problems and
challenges. Large businesses may have set ways of operating and establish procedures that are
hard to change. Small businesses are often far more flexible. It can also reach a quick decision
on whether or not it can do what is required. They operate in small premises with low heating
and lighting costs, and limited rent and rates to pay. Low costs result in lower prices for
consumers. By contrast, small firms are able to make a profit on much lower sales figures.
They can therefore sell into much smaller markets: e.g. a local window cleaner serving a few
hundred houses, a specialist jeweler maker with personal clients.
Press (2015) states that, “As a small business owner, you can do your own accounting,
or you may want to hire someone. Whatever you choose, you’ll still need to understand the
accounting process, your books, and what they tell you about your business.” Monitoring the
financial aspect of your business does require you to have at least an understanding of
accounting your transactions and sales, you cannot just rely on your hired employees to
interpret it fully for you. It may be complex and vague on your part as an owner and a not
inclined person for accounting, but you need to engage yourself to everything that concerns
your business. If you are to do your own accounting, it will be vital to learn the science of
accounting. Mere understanding of it would be insufficient for it will not give you full
satisfaction on what was really going on with your business, unlike hiring an accountant, it
will be more than handy on your party but will be costly.
Also, according to Bragg, S. & Burton, E. J (2006) in their book “Accounting and
Finance for Your Small Business” relating to small business, the most common situation in
which a control point is needed is when an innocent error is made in the processing of a
transaction. There can be an extraordinary number of reasons why a transactional error arises,
which can result in errors that are not caught, and which in turn lead to the loss of corporate
assets. Controls act as review points at those places in a process where transactional errors
have a habit of arising. A process flow expert who reviews a flowchart that describes a process
will recognize the potential for some errors immediately, simply based on his or her
knowledge of where errors in similar processes have a habit of arising. Many potential areas
of asset loss will involve such minor or infrequent errors that accountants can safely ignore
them and avoid constructing any offsetting controls. The need for controls also is driven by
the impact of their cost and interference in the smooth functioning of a process. (Braag, S. &
Burton, E. J, 2006 p.77)
Hatten (2015) states that, “The accounting process helps you to translate numbers—the
language of business—into plain English.”CEOs or simply owners of small businesses are not
always after every detail of the numbers plastered on reports, they always go on the bottom
line of all the sales and expenses that have occurred. They’re often concern on the
performance of their business, if it was a profit or loss on their part. Translating or interpreting
the numbers that a business obtained is the accountant’s responsibility, they are the key to
enlightenment and understanding of the users of the common tongue.
According to Blanchard (2011), accounting procedures during the start-up phase of a
small business should be substantially different than they will be once the business has
achieved recurring positive cash flows. Complexity doesn’t have to come your way at the start
of your business. You should first keep it as simple and as much as possible, low-cost. What
should concern you the most should be the mere survival of your business upon anything else,
to generate cash or to improve sales to pay up expenses and order supplies to run another
cycle. You can’t afford to pay an accountant at an early stage of the business that would be the
least on your expenses. It’d be beneficial if the owner itself does the accounting beforehand, it
is plain and easy to understand at the start up point of the business compared if it somehow
begins to expand and grow. A help from an accountant will be necessary once the business
succeeds.
According to the article “10 Things Shopping Malls Won’t Tell You” by JonelleMarte,
“More malls are investing in a tried-and-true tactic to get shoppers to stick around: feed
them.” She also said that the longer families stay in malls, the more they consume products or
services provided inside the mall. In the interest of keeping shoppers in the building, some
malls are renovating their food courts to bring in more local eateries, while others are opening
new wings dedicated to high-end restaurants. Department stores are also dedicating more
square footage to food by adding and expanding restaurants. Alongside with that, she stated
that malls are devoting more space and money to their food courts. Shoppers spend almost
20% more at a mall with a "good food court," according to a 2007 survey cited by Sharma.
And good, medium or otherwise, shoppers overall are spending more money on food at the
mall, according to the International Council of Shopping Center. Food courts brought in $792
per square foot in 2010, up 5% from the year before; restaurants brought in $459 per square
foot, up 4% from 2009.
There's another reason why malls are devoting more space and money to their food
courts. Shoppers spend almost 20% more at a mall with a "good food court," according to a
2007 survey cited by Sharma. And good, medium or otherwise, shoppers overall are spending
more money on food at the mall, according to the International Council of Shopping Center.
Food courts brought in $792 per square foot in 2010, up 5% from the year before; restaurants
brought in $459 per square foot, up 4% from 2009.”
According to “Business Start-Up & Resource Guide: Starting a Business in North
Carolina” published by The North Carolina Small Business and Technology Development
Center, “Buying a franchise Franchising has emerged as a popular way for potential business
owners to start a new business. A franchise offers advantages in name and product recognition,
proven operation procedures as well as volume purchasing power. In this arrangement, the
provider, or franchisor, contracts with you, the franchisee, to give you the right to sell or
distribute a service or product under the franchisor’s system in a particular area.” It has listed
the advantages of a franchise which are: some require relatively small capital investment with
franchise financing, initial corporate support for start-up, continuous management training and
counseling, existing goodwill and brand name appeal, standardized quality of goods/services,
proven products and business format , some opportunities require no prior experience in that
business field, buying power and programs, and development of advertising and promotions
programs (both local and national). Also the disadvantages of a franchise which are:
complicated legal negotiations, restrictions on purchasing, franchising fees, required to share
portions of business profits with corporation (sales/royalties), loss of personal control over
some aspects of operation, less freedom and opportunity for creativity, potential problems if
owner wants franchisor to buy franchise back limited control over pricing, product lines, and
suppliers, human resources policies may be instituted by corporation (potentially
unsatisfactory training programs), and actions by the corporation may affect business of
franchisee. (p. 20)
As Bazley, Hancock, and Robinson (2014) point out, “The managers of small
businesses (e.g. typically owner-operators) are confronted by the need to make decisions
similar to the operational and strategic decisions of larger firms. Thus, as for large firms, the
making of good decisions will be influenced by the quality of accounting information that is
made available to small business managers and how well they use it. However, unlike larger
firms, a small business is constrained by the level of economic and human resources that can
be committed to acquiring accounting information and the financial literacy skills that can be
applied to analyzing and evaluating that information.”
According to (Kim & Marion, 1995), homogenous goods are mainly determined by
prices or costs while differentiated goods are determined by product diversity”. So it could be
interconnected to this research because the main focus of this study is to know basically the
strengths and weaknesses of selected food stalls. This simply means that if the food stalls offer
the same variety of products then the main factor to be considered by the consumers is the
price of the product being offered, because there are many option and alternative that a
consumer may consider in buying a specific product. Unlike if the product is differentiated,
there will be no choice for the consumer because the ones offering the product are limited.
(New York Institute of Technology, Bahrain) states that “a corporate governance
system can be a set of processes and procedures used to direct a corporation’s business”.
Basically it means that there are many aspects that affect the performance of a firm. And in
relation with this study a firm should employ a corporate governance system in its accounting
procedures for the records to be clear and precise. And this system should be the core of all
accounting transactions happening inside and outside of the firm. It may have no direct effect
in the profit of the company but this system could help the firm for it to be organized
throughout its operation.
According to (Pandian &Narendran, 2015), “The ability of an organization to analyze
its financial position is essential for improving its competitive position in the marketplace”. In
relation with this study the firm may employ financial ratios in its financial statements to
know their strengths and weaknesses. Every firm’s target is to be profitable so it is essential to
know their position in the marketplace. The concept of the New York Institute of Technology,
Bahrain as mentioned earlier will have an impact with these financial ratios because all the
records of the company should be clear and precise in order for the financial ratios to be
accurate for the firm to know their position in the marketplace.
(Tehrani, Mehragan&Colkani, 2012) “performance evaluation is itself in the need of
some indexes through which to evaluate corporate performance, in fact it is a guide form what
it is towards what is should be”. In relation with the previous paragraph one of the indexes
that should be considered is the financial ratios. It will be the guide for the firm to know what
is happening inside particularly with their financial performance. It will also be the guide if
the systems I.e.(accounting system) is functioning properly. And lastly it will be the guide in
making their future decisions that could help them improve and progress.
As per dictionary the definition of a small business is an independently owned and
operated company that is limited in size and in revenue depending on the industry. Most small
businesses use less complex accounting system for them to make records of everyday
transactions easy.
He also gave six tips on how to keep business finances in order which the researchers
thought will be helpful for owners. First is keeping personal and business finances separate.
This will let those people to monitor their finances easier and will avoid them in confusion
that may lead to overstatement or understatement of revenues. This will make tracking your
spending far more complicated than it needs to be. Next is to choose accounting software that
makes sense for your business. Cloud-based tools allow you to view real-time insights, and
they can be accessed from anywhere at any time. The ability to keep an eye on your finances
on the fly gives you a great deal of flexibility as a business owner. Today more than ever, there
are lot of options to choose from and if non satisfaction prospers with the current service, one
can always make the switch to another platform that better matches their needs. Most people
aren't numbers people, and will never be excited about them as much as accountants or
bookkeepers are. If managing your own finances is starting to get on your nerves, it's time to
look into hiring a qualified bookkeeper. Many entrepreneurs have a tendency to try to handle
everything themselves. But as with legal matters, the granular elements of small-business
accounting aren't usually within a business owner's wheelhouse. Monitoring finances and
projecting future revenue and expenses will enable to make better long-term decisions for the
business. Even if unexpected expenses do rise, if owners have been practicing conservatism in
spending, they shouldn't run into any major problems. To be organized means planning ahead
that includes creating a budget. A budget is not a tool for planning out how every penny
should be spent. Rather, it's a framework that you can use to help you make clear-headed
decisions, whether it's increasing your marketing spend, or cutting expansion costs to keep
your profits on track. Credit unions are invaluable to small-business owners, especially since
they are often willing to provide loans at competitive rates. Some of the other advantages of
credit unions include fewer transaction fees and account service charges, as well as flexible,
customized services. Credit unions also keep profits within the community, and help budding
entrepreneurs get their dream businesses off the ground.

In an article entitled “The 7 Key Metrics Every Business Owner should monitor”, tells
that knowing these metrics will not just inform the business’ health but also monitor how these
metrics are performing on an ongoing basis. It also states that 28% of businesses fail due to
problems in handling financial structure of the company. There are a different metrics that
every business owner should know, including cash flow, accounts payable, accounts
receivable, direct costs, operating margin, net profit, and cash burn rate.
Basically, cash flow measures the flow of the business’ money, which are the inflow
and the outflows. Know that the money that goes out of the business is negative cash flow and
the money that comes in is a positive cash flow. But most important is, cash flow isn’t your
profit because profits and cash aren’t the same thing. Accounts payable is the total of the bills
that you have to pay, but that you haven’t paid yet. It’s important to track this metric so that
you can manage your cash flow. After all, if you can’t manage your debts, you could risk
defaulting. Tracking your accounts payable is a critical component to managing your cash
flow. As your business grows, you may be spending money on different services for your
business and you will receive invoices that need to get paid. Accounts receivable is the
amount of money that your customers currently owe you for things that you have already sold
to them. Essentially, it’s a total of all of the invoices that you have given to customers but that
have not been paid yet. Tracking your accounts receivable is crucial to managing your cash
flow. While your sales might be going well, if your accounts receivable continues to grow and
your customers aren’t paying you fast enough, you could find yourself in a cash crunch.
Understanding direct costs helps you keep an eye on how much it is costing your company to
deliver its product or service. If your direct costs are going up, perhaps your suppliers are
starting to charge you more, or perhaps fuel costs are going up. When your direct costs go up,
it might be time to start looking for new suppliers or to try and cut costs in your business.
Operating margin shows you how good your company is at generating income from normal
operations of the business, after you’ve spent money on marketing, sales, product
development, etc. Net profit is understandably a metric that you’ll always want to see positive,
and as high as it can be. If this number is negative, your business is probably in trouble. You’ll
need to check your cash flow to get an accurate reading on not just your profit from sales, but
the actual cash on hand your business has to stay afloat. Cash burn rate is the rate at which a
company uses up its cash reserves or cash balance. This metric is designed to show you how
fast you’re burning through your cash reserves or how you’re maintaining a healthy balance
from positive cash flow.
In the study of “Contracts, Externalities, and Incentives in Shopping Malls” by Eric D.
Gould, B. Peter Pashigan, and Canice J Prendergast, it used a unique data set of mall store
contracts to analyze the complex economic issues that arise when stores a placed together in
close proximity within a large shopping mall. While shopping malls economize on consumer
search costs by bringing a large number of stores together in a single location, they also create
a complicated web of externality and incentive issues between the store owners and the mall
developer. They have come to conclusions that first; mall contracts are written to internalize
externalities to such an extent that space is efficiently allocated in the mall. In that sense, their
study shows how the ability to contract on relevant variable (in their case, sales) can help to
counteract the inefficiencies sometimes characteristic of externalities. Second, is that they
believe that the study makes a contribution to the empirical literature on agency theory. It does
so in the context of a situation of team production, where the efforts of all relevant parties
(anchor stores, non-anchor stores, and developers) affect sales on all their parts, subject to a
budget balancing constraint.
In a study entitled, “The Relevance of Accounting Records in Small Scale Business:
The Nigerian Experience” by Raymond A. Ezejiofor, Ezenyirimba Emmanuel (Ph.D), Moses
C. Olise, they stated that although small scale enterprises may not be able to adopt elaborate
systems of accounting, a number of small scale business kept no records pertaining to their
financial operations, finance, etc while some employed professional accountants to keep
proper accounting records of their business. The accounting records keeping contribute to the
performance of small scale business hence small scale business not actually kept proper
accounting records of their activities; they could be encouraged by customized adaptive
systems.
In a campaign made by Association of Chartered Certified Accountants (ACCA),
Accountants for Small Business, aiming to raise awareness of the value of professional
accountants in SMEs. It is through people, process and professionalism; accountants are
central to great performance. According to ACCA “Governments are heavy users of
information about SMEs and become more so as their economies develop.” They managed to
make more of the healthier parts of the informal economies into the formal sector through the
use of better infrastructure and public institutions, as well as more proportionate taxation and
regulation (Schneider 2009). Obviously, governments have a great deal to gain from business
formalization, as this allows them to monitor and anticipate tax revenues as well as to improve
their control over the social impact of enterprises. It is also synonymous to the building of a
business’ finance function. Business begin to become “formal” when they start to give an
account of themselves to the state or before the law – signing contracts; acquiring licenses and
permits; demonstrating compliance with employment or other regulations; paying taxes and
social insurance contributions; tendering for government contracts.
According to ACCA’s research (ACCA 2012a) also shows that financial capabilities in
SMEs are not just a consequence of growth, but one of its causes. Even after accounting for
turnover, headcount, age and sector, SMEs with well-developed financial capabilities are
much more likely than others to be growing rapidly (at over 30% a year over three years or
more) and still retain a ‘low’ or ‘minimal’ risk rating .

Strengths and Weaknesses of Accounting System/Processes


Amanda McMullen stated in her article, The Strengths and Weaknesses of Revenue
Accounting System, that a small business typically keeps records of its transactions using a
revenue accounting system. Such a system allows the company to record the money it receives
during each accounting period. It is the process of recording the revenue a business receives
from financing, cash advances, investments and the sale of goods and services. Some revenue
accounting systems also deduct certain expenses from the revenue received, such as the cost
of producing goods or providing services. Businesses use their revenue accounting systems to
evaluate their financial situation during each accounting period. They may also use these
systems in tax preparation. In preferring this kind of system lets business to monitor such
revenues at any point in the accounting period, this can also help if owners would like to see
which source in the business provides more revenue. Hence, by using this revenue accounting
will be beneficial in comparing reports from multiple periods; it can also analyze changes in
revenue patterns and use the information in decision making. Also having a separate
accounting system devoted to revenue provides a business with better organization, which can
be helpful during tax preparation and corporate audits. Having such strengths demand for
weaknesses too, one of which is embezzlement if an employee has unrestricted access to the
company's accounts. Human errors are inevitable in any business, making financial statements
lead to bad decision making and may occur complications when computing and filing for tax.
In the case of the study of PESTLE Analysis’ Contributor regarding the topic SWOT
Analysis, “For small businesses, it is important to analyze all situations carefully before taking
any decision. That way, there will be fewer chances of making mistakes and designing
strategies that won’t work.” To help these businesses, there are analytical tools available on of
which is the SWOT Analysis. However, before starting this analysis, it is best to know and
understand first what this analytical method is all about. This analysis is used to list down
advantage and disadvantage that go against a particular condition.
In simple words, SWOT analyzes the Strengths, Weaknesses, Opportunities and
Threats that are associated within and outside the business considering all the aspects that can
affect the business and market. This way, business managers can understand whether a certain
situation has enough aspects in its favor and ultimately worth being pursued.
This assessment technique has proven an almost accurate outcome and greatly useful
insight to every business’ resources.

Accounting Process and Practices


As Oladejo (2008) points out, “The achievement of the firm’s objectives is
greatly influenced by the application of accounting records.” It is pivotal for a company, may
it be big or small, to implement the accounting processes in a manner that would be beneficial.
It can have a huge impact in the financial health of the company as a whole. Reaching the
objective need not compromise the effective application of practices in dealing with the
accounting and financial aspects of an entity.
Holmes and Nicholls (1998) concludes that the extent of accounting practices in SMEs
depend on a number of factors such as age of business, size of the business, and the nature of
the industry. They further point out that most SME owners and managers engage public
accountants to prepare required information.
In the article, “Accounting for Start-ups: Cash-basis or Accrual basis” by Jason Chen,
he has discussed each accounting method. He briefly defined each as first, ““Cash-Basis”
accounting means you only count revenue and expenses that you actually have.” and second
“Accrual-Basis” accounting means you count pledged revenue and expenses.”. He stated that
in dealing with the taxes, it is ideal to use the cash-basis accounting method for the only basis
of the tax is the cash you have on hand. “You have to pay taxes with cash. With cash-basis
accounting, you show a profit only if you have excess cash actually in your possession. If it’s
in the bank, you can set it aside for taxes. Not so with accrual-basis. If you get a huge
purchase order from a new customer, that would show as income; then the IRS wants their
30%, but since the customer hasn’t paid, you don’t have the cash to pay.”, he said.
For better understanding of the business, the writes says that accrual method of
accounting is more ideal this time around. “The trouble with cash-basis accounting is that it
has nothing to do with when you incurred the expense, but rather when you paid the bill. You
might have paid late (on purpose or otherwise). You might have paid early for a discount. The
bill might have appeared on weird days so it just so happens that you paid a monthly bill twice
in March and skipped April. Same with revenue — at Smart Bear it was common for a
purchase order to be paid 5, 30, or even 90 days late. We won the order — the marketing
worked, the sale was approved, tech support satisfied the end users — but who knows what in
month the revenue would actually hit the bank account.”, he stated.
According to Bragg and Burton (2006), accounting encompasses at least three
purposes: financial reporting, product or service cost reporting, and performance evaluation
reporting. Meaning, accounting largely contributes to business that will make it last long term.
It’s one of the departments that must be maintained in order to support the growth and
maintenance of a business. It must be given importance for it could give certain advantages
against competitors, or if neglected, it could be the cause of a breakdown or a loss at some
point in time.
According to the article “Small Business Accounting Procedures” by Sheila Shanker,
“Small business procedures regarding accounting are simple and focused, decreasing possible
confusion. Your business might set up procedures for paying bills, receiving money,
processing credit cards, entering data in accounting systems and performing reconciliations.
Often businesses compile procedures to create an accounting manual, which help in training
new personnel.”
Under the Accounting Department procedures, “Reconcile cash once a month with
bank statements. The reconciliation is usually signed off by a manager or a business owner.
Any corrections and adjustments should be made to cash accounts on the book right away.
Reconcile accounts receivable and payable monthly to make sure they agree with the general
ledger. Do financial reports the first week of every month for the prior month--after all
reconciliations are performed. A common financial report is the ‘balance sheet’, showing cash,
receivables and payables. The other standard report is the ‘income statement’ with income and
expenses.” Shanker added.
According to IDT Consulting, in the Food Franchise industry, the volume of
transactions that need to flow through an accounting system is monumental. For one location
alone, the business must handle issues that arise from massive amounts of data entry and the
need for the quick turnaround of financial statements to make important business decisions.
Multiply this already extensive amount of processing by several locations and the mountain of
data can quickly become unmanageable.
Consequently, a lot of time is spent each month just for manually tracking receipts and dealing
with payroll in order to provide companies with their month end financial reports. These
activities are usually time-consuming, lending to little to no value for the company’s basis for
measuring and analyzing its financial performance.
“Large corporations are not the only ones that “cook the books.” However, small
businesses are not usually overstating profit, but instead have a tendency to understate
earnings in the hopes of minimizing taxes. This can be detrimental to the small business
owner, and often the consequences of these actions are not revealed for many years and the
punishment or actions may be quite severe.” (Wright, 2005 Small Business Guide, p40) With
that being said, it is very evident that the accounting processes and procedures alongside with
the acts to falsify and alter financial records employed by a company may, if not all times, be
just the same for small and large businesses.
Hussein (1983) noted that, a good accounting system is not only judged by how well
records are kept but by how well it is able to meet the information needs of both internal and
external decision-makers. In his view, Clute (1980) corroborated the statement and maintained
that it is common for qualified accountants to do a good job of keeping records up to date but
they fail to provide information needed by decision-makers.
In an article “Small Business Accounting, Big Deal” by Michelle Wright, small
businesses are not usually overstating profit, but instead have a tendency to understate
earnings in the hopes of minimizing taxes. Many small business owners have turned to the
bank to finance capital expenditures only to be turned down due to past sales performance. A
reason that improper accounting is detrimental to as small business is the potential for growth
through investors or the opportunity to sell the business. If the small business owner is looking
for growth and seeks investors, the investors will want to see past performance of the
business. They too will rely on the numbers that have been reported on the tax returns. It is
important for small businesses to use proper accounting practices. These practices involve
properly recording all business receipts (yes, even cash); making sure that only business
expenses are included in the business’s financial statements and on the tax return; and
accounting properly for any debt incurred by the business and for any loans that the business
makes to related parties. In the end, proper accounting practices and financial planning will
prove to be more beneficial than the short-term results of “cooking the books.”
According to the book “Recordkeeping for Small Business” by Alberta Economic
Development and Tourism, “Bookkeeping can be defined simply as keeping daily records of
business financial transactions. These records include daily cash sheet, accounts receivable
and accounts payable ledgers and a synoptic (combined) ledger. It is therefore important that
you make a habit of bookkeeping every day, perhaps every morning with your coffee. It only
takes a few minutes, and it will help you to make better informed business decisions. Records
are kept for various reasons, one of them is to be monitored of the daily cash transactions of
the business, also to assess whether financial performance is meeting the business’
expectation, projections and goals, to provide the accountant the necessary information to
easily and accurately prepare the income tax return.