When it comes to running a business, accounting is often viewed as a complex and misunderstood area. This has given rise to many myths that can mislead entrepreneurs and business owners, often leading to poor financial decisions turning a good business into a bankrupt one. Let’s debunk some of the most common accounting myths and clarify why they can be harmful if believed.
Accounting is necessary during the tax season only
Accounting plays a crucial role in day-to-day operations of any business and helps the owners or management to make an informed decision. It helps track cashflow, manage expenses, and helps with future projections. A proper accounting system not only ensures tax compliance but helps run your business in a healthy manner.
Profits mean a business is thriving
This is the most popular myth that people usually have with accounting and Accountants. In accounting, profit means net profit reflected in an income statement; however, a profitable business might suffer poor cash flow and sometimes a profitable business might need to be shut down due to inadequate cash flow management. Here, it is important to understand that cash flow is the bloodline of any business, not profit. Hence, keeping an eye on both cashflow and profit will only make business sustainable in the longer term.
Bookkeeping and accounting are the same
Often used interchangeably, bookkeeping and accounting are distinct functions. Bookkeeping involves the day-to-day recording of financial transactions, while accounting involves analysing, interpreting, and presenting that data for decision-making. Business owners need to get a complete picture of their financial situation. It is important to understand that bookkeeping is a part of the accounting process, and any accounting process starts with proper record-keeping i.e., bookkeeping.
DIY accounting saves money
With the rise of AI/ML tools and their application in the accounting software industry, many business owners think that they can manage their accounting on their own. However, it’s partly true i.e., of course the knowledge of Debit/Credit is no longer required to maintain a book; however, when the trouble comes, a professional accountant is required to handle the books. Further, accounting involves much more complex tasks like taxes, payroll, finance, reporting, etc., and a business owner might not be very skilled in these aspects. Similarly, the job of the business owners is to drive their core business, and getting involved in accounting process might distract them from the core business. Hence, it is sustainable in the long term to outsource accounting functions and focus solely on business growth. We know accounting firms, that helps clients with accounting processes, that outsource their own internal accounting to other firms – they’re not less knowledgeable but very smart not to let auxiliary activities distract them.
Small businesses don’t need professional accounting
Some business owners think that only large companies need professional accounting services. However, small businesses are the ones who need tailored accounting guidance and value much more in the initial stages of a business. An accountant is not only a number cruncher for you but used strategically so that an accountant can add value to your business and give you insights that can help thrive your business. A good Accountant helps optimize tax strategies, improve cash flow, and provide insights that help guide business decisions, regardless of the size of the business.
If there’s no profit, there’s no need to pay taxes
This is a very common misconception. Accounting profit have minimal relation with the way the tax system calculates profit or income for the purpose of calculating taxes. Hence, even if the financial statement reflects loss, there might be a situation where you still need to pay taxes. Further, this is only about income taxes; however, there are different taxes attracted to a business-like payroll tax, Fringe Benefit tax, Capital Gain Tax, GST etc. Hence, the help of a professional Accountant will help you avoid penalties and fines over non-compliance of such regulations.
At Budgetwise, we work based on facts so that you can focus on growing your business while we ensure that compliance is in perfect order. Trust us to guide you through every step, so you avoid costly mistakes and build a sustainable future. Book a free consultation to get started with us now.