Tag: accounting

  • Financial Audit: Performing a Self-Audit on Your Business

    Financial Audit: Performing a Self-Audit on Your Business

    Many business owners wait until the next financial crisis before carrying out a financial audit.

    Making financial reports can be hectic and time-consuming. A lot of time is lost digging through records, receipts, and tax documents.

    Benefits of a Financial Audit

    However, performing a financial audit is crucial! It can help you reduce risks and evaluate little expenses that add up to damage your business.

    In one of Benjamin Franklin’s famous quotes, as seen on Forbes, he warned business owners to be wary of little expenses.

    So, what can you do to save your business? Precisely, how can you curtail accruing “little expenses”?

    The answer to those questions is to evaluate your spending through audits – internally or externally. If the expense attached to external assessments scare you, did you know you can do a self-audit?

    Read on to find out more of the benefits of a self-audit and how to implement it on your business.

    Eliminates Internal Theft or Embezzlement of Funds

    A thorough self-audit not only evaluates your financial documents, but reviews your company’s policies. If there is no threat of fraud, there might be loopholes in your company’s procedures.

    Luckily, a self-audit helps find those loopholes. You will also examine vital policies such as internal controls, record-keeping, protection against theft, and spending limits.

    Prepares You for Possible External Probing

    A self-audit reveals and evaluates crucial areas of your business. In this way, it safeguards you against external probing because you already know what and where to check to plead the case of your company.

    It Is Affordable

    Unlike external audits that require you to employ third-party agencies, self-audits are in-house. At most, you’d select a representative from all divisions of your company to form a committee. Think about it, will that cost you a dime?

    How to Carry Out Your Own Financial Audit

    • Find the Right Time

    Say that you run a winter clothing line. Conducting a self-audit between December and February is ill-advised. Why?

    Winter months are likely periods with massive sales in such a business. As such, any financial assessment during that time won’t be thorough.

    On the other hand, summer months are likely perfect for self-audits. In other words, you would likely have time to evaluate your financial documents with undivided attention.

    • Gather Your Financial Records

    Now gather all essential records such as bank statements, invoices, and sales receipts. After assembling the documents, send them to the accounting department for close evaluation.

    While you’re at it, review your accounting policies so that documents are promptly sent to the accounting department.

    • Review Your Record-Keeping Policies

    Additionally, look into your records retention practices. Do you store records adequately?

    If no, put a system in place that archives your canceled checks, cash register tapes, and invoices.

    Also, evaluate your policies on protection against theft. Is your accounting software password protected? Do you separate accounting duties amongst your employees?

    Lastly, analyze your tax records against the tax returns. Are there any non-correlating reporting or numbers?

    • Examine Your Cash Flow

    Say you spent below $2000 on logistics all through 2019. And in the first quarter of 2020, you’d already spent over $3000. When you find such alarming increases, query it. 

    And you should not stop there. Look at the percentages. What part of your business accrued expenses so much?

    The answers will help you build systems to cap spending for each segment of your business. 

    However, you don’t need to compare annual figures only. You could do more frequent audits. Monthly evaluations let you look at expenses such as data charges, service contracts, and logistics.

    With these tips, performing a financial audit is not as difficult as it seems. More importantly, these steps could help you find cash-flow leaks in your business.

    If you would like help with your financial audit, we would love to be of help! Contact us today!

  • Common Accounting Terms Explained

    Common Accounting Terms Explained

    Have you ever felt so confused after speaking with your accountant? If so, don’t fret! We’ve compiled different accounting terms and abbreviations along with their meanings. However, while this would do great for a business owner, it’s for anyone interested in building their accounting vocabulary. 

    Accounts Receivable (AR)

    Accounts receivable are lawfully enforceable claims for payments taken by a business for services rendered, or goods supplied that consumers have bought but not paid for. In essence, it is the money customers owe after goods or services have been provided to them. 

    Accounts Payable (AP)

    Accounts Payable is the amount of money a company owes creditors (suppliers) in return for goods or services they have provided. 

    Accrual (ACR)

    Accrual is a list of expenses a company has incurred or agreed upon but has not yet paid for. It is also a list of sales that have been made but not yet billed.

    Asset

    Asset refers to anything of monetary value that a company owns. It’s the wealth that has been accumulated and owned by a company without a loan or lien.

    These may be goods sold to customers, cash, investments, land, property, equipment and supplies, warehouse inventory, and more. 

    Bad Debt Expenses

    Bad debt is incurred when customers owing don’t pay up and are likely not to pay.

    Balance Sheet (BS)

    Balance Sheet is a snapshot of a company’s financial status, including assets, liabilities and equity at a particular time. The accounting equation when it comes to a balance sheet is: Assets = Equity + Liabilities. 

    Book Value (BV)

    When an asset depreciates, it loses its value. The book value shows the original value of assets.

    Capital (CAP)

    The amount of cash, goods, assets used to start up a company is called capital. You can calculate capital by subtracting the current asset from the current liabilities.

    Cash Flow (CF)

    Cash flow is the revenue expected to be generated by a company through business activities over some time after you made payments (e.g. rent, taxes) and received payments from goods or services sold to customers.

    Credit (Cr)

    Credit is an accounting entry that may either increase liabilities and equities or decrease the assets of a company’s balance sheet.

    Debit (Dr)

    An accounting entry that may either increase assets or decrease the liabilities of a company’s balance sheet depending on the type of transaction made. 

    Depreciation (DEPR)

    Depreciation occurs when business assets such as goods or equipment decrease in value over time due to use or abandonment.

    Dividends (DIV)

    These are distributions of the portion of a company’s earnings to shareholders of the business. It is usually issued as cash, property or stock market value.

    Expenses (EXP)

    Expenses show the cost incurred by a business to generate income or maintain business activities.

    This could be;

    • Fixed Expenses, like rent, workers’ salaries, paid at a scheduled period.
    • Variables: include expenses like labour costs that fluctuate based on the increase or decrease in production or sales.
    • Accrued: expenses which haven’t been paid yet.
    • Operating Expenses: These are expenses that are not directly associated with the production of goods and services. 

    Equity (EQ)

    Equity is the amount of money invested in the company by shareholders. This is usually the money left over after liabilities have been subtracted from assets.

    Fiscal Year (FY)

    A Fiscal year is a measured amount of time (usually 12 months period) that marks the beginning and end of the financial records of a company. The fiscal year doesn’t always correspond with the calendar year. For example, a company’s fiscal year can run from March to February.

    Inventory (INV)

    These are assets purchased by a company to sell to customers but remain unsold.

    Liability (LIAB)

    Liability is a debt a company has to pay. It includes salaries, taxes, the amount payable, utilities, loans etc.

    General Ledger (GL)

     General Ledger is the total record of transactions over the life of a company. 

    Gross Margin (GM)

    Also known as Profits, it’s the total number of sales made subtracted from the associated costs such as manufacturing costs, suppliers cost, etc. 

    Net Income (NI)

    Net Income is a company’s total earnings. You can calculate Net Income by subtracting total expenses from total revenues.

    Liquidation (LIQ)

    Liquidation happens when assets are converted into cash to pay off debts.

    Revenue (REV)

    Revenue is the sum of all the money generated by a company, usually through sales, before you subtract expenses.

    Return on Investment (ROI)

    ROI is calculated by dividing the net profit of a company by the total cost of the investment. This shows how successful an investment is by showing profits gained or loss.

    Variable Cost (VC)

    Variable costs changes as the number of goods that a business offers changes. These costs are the total marginal costs over every unit produced. For instance, if a business produces a commodity and sells more of those goods, it will need more raw materials to meet the increase in demand.

    Improve your accounting vocabulary today! It would be worthwhile to devote time to learn the terms mentioned above.  As you do so, apply these basic accounting terms in your conversation, and you’ll be amazed at how you’ll improve!  If you find any of them confusing or need help, contact us at Sound Accounts, because our strength is your numbers!