Understanding Business Accounting For Dummies, 2nd Edition (17 page)

Continuing education:
Many short-term courses, e-learning, and home-study programmes are available at very reasonable costs for keeping up on the latest accounting developments. Accountancy bodies that give practising certificates, which allow accountants to work with businesses in public practice, will expect them to take continuing education in approved courses in order to keep their practising certificates.

Integrity:
What's possibly the most important quality to look for is also the hardest to judge. Bookkeepers and accountants need to be honest people because of the amount of control they have over your business's financial records.

Protect the family jewels: Internal controls

Every accounting system should establish and vigorously enforce
internal controls
- basically, additional forms and procedures over and above what's strictly needed to move operations along. These additional controls serve to deter and detect errors (honest mistakes) and all forms of dishonesty by employees, customers, suppliers, and even managers themselves. Internal controls are like a public weighbridge that makes sure that a heavy goods vehicle's load doesn't exceed the limits and that the vehicle has a valid licence. You're just checking that your staff is playing by the rules.

For example, to prevent or minimise shoplifting, most retailers now have video surveillance, tags that set off the alarms if the customer leaves the store with the tag still on the product, and so on. Likewise, a business has to implement certain procedures and forms to prevent, as much as possible, any theft, embezzlement, scams, and fraud (and simple mistakes) by its own employees and managers.

In our experience, smaller businesses tend to think that they're immune to embezzlement and fraud by their loyal and trusted employees. Yet a recent study found that small businesses are hit the hardest by fraud and usually can least afford the consequences. Your business, too, should put checks and balances into place to discourage dishonest practices and to uncover any fraud and theft as soon as possible. For example, virtually every retailer that deals with the general public installs protection against shoplifting. Likewise, every business should guard against ‘internal shoplifting' or fraud by its employees and managers.

Keep the scale in balance with double-entry accounting

A business needs to be sure that
both
sides of the economic exchange are recorded for all its transactions. Economic exchanges involve a give and take, or something given for something received. Businesses (and other entities as well) use the
double-entry accounting method
to make sure that both sides of their transactions are recorded and to keep their books in balance. This method, which has been used for hundreds of years, involves recording certain changes as debits and the counterbalancing changes as credits. See ‘Double-Entry Accounting for Non-Accountants,' later in this chapter, for more details.

Check your figures: End-of-period procedures checklist

Like a pilot before take-off, an accountant should have a clear checklist to follow at the end of each period and especially at the end of the accounting year. Two main things have to be done at the end of the period:

Normal, routine
adjusting entries
for certain expenses:
For example, depreciation isn't a transaction as such and therefore hasn't been recorded as an expense in the flow of transactions recorded in the day-to-day bookkeeping process. (Chapter 6 explains depreciation expense.) Similarly, certain other expenses and some revenues may not have been associated with a specific transaction and will not have been recorded. These kinds of adjustments are necessary for providing complete and accurate reports.

Careful sweep of all matters
to check for other developments that may affect the accuracy of the accounts:
For example, the company may have discontinued a product line. The remaining stock of these products may have to be removed from the asset account, with a loss recorded in the period. Or the company may have settled a long-standing lawsuit, and the amount of damages needs to be recorded. Layoffs and severance packages are another example of what the chief accountant needs to look for before preparing reports.

Lest you still think of accounting as dry and dull, let us tell you that end-of-period accounting procedures can stir up controversy of the heated-debate variety. These procedures require that the accountant make decisions and judgments that upper management may not agree with. For example, the accountant may suggest recording major losses that would put a big dent in the profit for the year or cause the business to report a loss. The outside auditor (assuming that the business has an audit of its financial statements) often gets in the middle of the argument. These kinds of debates are precisely why you business managers need to know some accounting: to hold up your end of the argument and participate in the great sport of yelling and name-calling - strictly on a professional basis, of course.

Keep good records: Happy audit trails to you!

The happy trails that accountants like to walk are called
audit trails.
Good bookkeeping systems leave good audit trails. An audit trail is a clear-cut path of the sequence of events leading up to an entry in the accounts; an accountant starts with the source documents and follows through the bookkeeping steps in recording transactions to reconstruct this path. Even if a business doesn't have an outside accountant do an annual audit, the firm's management accountant has frequent occasion to go back to the source documents and either verify certain information in the accounts or reconstruct the information in a different manner. For example, suppose that a salesperson is claiming some suspicious-looking travel expenses; the accountant would probably want to go through all this person's travel and entertainment reimbursements for the past year.