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Going self-employed in 2022? Basic accounting terms you need to know

December 5, 2021 Accounting, Bookkeeping, Business
If you have made the big decision to go self-employed in 2022 or still considering your options, here are some basic accounting terms you need to know when operating your business. 
Accounting is the language of business, which communicates the accurate picture of business operations, whether you are a sole trader, operating as a partnership or a company. Financial performance and financial position are the two most essential factors assessed at the end of each specific period, known as reporting period. The financial performance depicts what the business earned or lost, which is calculated through profit and loss, also known as an income statement. In this statement, the revenue (income) is compared with expenses (business spending) to ascertain the profit/loss figures.
Going self-employed in 2022? Accounting terms you need to know
Let’s assume that during last month your business earned an income of $20,000 and incurred $15,000 as an expense, which means that you have earned net income/profit of $5,000. In case of higher expenses than income, the business would be operating at a loss.
The reported amount of profit or loss will determine the direction of the business’ future decisions. If you generate a lower profit or suffer loss, these can be amended by increasing sales volume, increasing per unit sale price, or reducing expenses. It’s best to talk to your accountant and make sure that the amendments are in line with your business, marketing and growth strategies.
The business’s financial position shows how much the business owns in terms of cash, receivables, machinery, plant and vehicles. In accounting, all these items are collectively known as assets. On the other hand, the financial position also tells us how these assets are financed and whether they are purchased from a third-party supplier or invested by the owner in the business. In case if the assets are purchased from a vendor with a future payment commitment, then this will create a liability. All future obligations of the business are known as liabilities, i.e. accounts payable, bank loans, salaries payable, tax payable etc. Sometimes, the owner brings these assets into the business, which are termed as owner’s equity. So we can express this financial position with the following equation, known as the accounting equation.
Assets = Liabilities + Owner’s Equity
Let’s assume the business has three assets, a building costing $40,000, a vehicle $15,000, and cash $20,000, which is borrowed from a local bank. The building and vehicle are brought in by the owner into the business. Keeping in view the above-mentioned figures, the accounting equation of the business will be shown as in the following.
Assets                                                                         = Liabilities       + Owner’s equity
Building Vehicle Cash                = Bank Loan      + Owner Investment
$40,000 $20,000 $20,000           = $20,000           + $60,000
So the total of assets is $80,000, and the total of liabilities and owner’s equity is also the same. In business books, all accounts basically fall under these three categories. If the business is selling goods, then the goods are the assets of the business until they are sold to a customer.
The statement of financial position is also prepared with these three components, assets, liabilities, and owner’s equity. You can observe the position of its business by checking the amount of assets, but he also has to focus on how these assets are financed. If the business is purchasing all its assets on credit, these will increase the amount of liabilities, which will not be a positive indication for any successful business.
In a general sense, it is perceived that accounting and bookkeeping are the same. However, accounting is a vast subject in which also includes financial accounting and management accounting. Bookkeeping is the process of recording financial transactions in the books of accounts, which are further classified into respective accounts. These individual accounts are used to check the financial performance and financial position of the business through the statement of profit & loss and balance sheet.
Accounting might seem like a complex subject for someone going self-employed for the very first time. However, no matter what industry you operate in, at Spectrum Accounting, we act as a partner helping you grow your business. If you ever have any questions, we are here to help. Let’s talk about your new business and make sure you are set for success from the very beginning. Get in touch with us today. 

Look for these key factors when appointing an Accountant

October 4, 2021 Accounting, Bookkeeping, Business, Consultant

Your business might have grown a lot or just a little recently, but you know it’s time to find a trusted accountant who would help you grow and get fantastic results.

With so many accounting firms in New Zealand, you might be wondering what they offer and how you can choose the right account for you. All of them might be real professionals but might have different industry experiences or offer an additional support level.

Read further to find out what you need to consider when hiring an accountant.

  1. Looking into the future

It’s vital in business to look back and evaluate what went well and what did not. Some accountants are great at reporting based on what has already happened, but a great accountant should be able to tell a story with numbers. That story needs to translate the results into forecasts and guidance. At the end of the day, you want to learn and grow and not just look at reports. Ask your accountant if they can help with forecasting and planning for your business.

  1. Available technology and tools

In the modern world of working remotely, business owners appreciate online tools, especially when they can be used from anywhere in the world. How handy would it be to have access to your accounting dashboard while having a cup of coffee and a caramel slice on your deck? Very handy, indeed. This is where software like Xero makes our lives easy. A great accountant will be able to help you set it up and provide training and support so you can get real-time data on the tip of your fingers. Ask your accountant if they use cloud-based accounting and can dedicate time to showing you how to use it.

  1. Client relationship and customer service

Customer service and client relationship is a big deal in the service industry. There is no difference between “big” and “small” clients in customer service. When looking to hire an accountant, it is a great idea to set up an initial meeting to see if you are comfortable asking them questions about your business. It’s also a great idea to see how you can work together, as an accountant should be your trusted partner. Go ahead and check out reviews first to see what other clients say about the accountant you are thinking of hiring.

  1. Fear-free and zero judgement environment

Do you shiver when accountants talk numbers and send you reports? Some business owners do. While running a business, you might know the basic concepts of accounting. Understandably, accounting might not be your field of expertise. So relying on an accountant to explain things in plain English is a fair call. A meeting with an account should really be easy and conversational as if you are talking to your friend and business partner. No one wants to leave a meeting feeling lost, or the worst-case scenario, misinterpret the information your accountant just tried to communicate to you. Ask your accountant if they can set up a meeting with you and see if you feel 100% comfortable in it.

  1. Pricing options

Accounting firms offer packages for businesses of various sizes, and hence, a different level of support. What might work for the “big fish” won’t work for a small or medium-sized business. What is more, if an accountant charges per minute like lawyers, perhaps you won’t be getting from them the amount of support you were hoping for. We think that a much better and fairer way to charge for the time is only the actual time spent on our clients’ books. Have a chat to an accountant you are considering engaging to see what billing process they follow.

It’s definitely a good idea to look around and consider the 5 things listed above when looking for a perfect accountant. If you would like to chat with us and see if we can work together, then get in touch via our contact form or by calling us on 021 274 0289.