learn about accounting and how it affects you
Double-entry bookkeeping has been around for centuries.
Accounting principles and practices have existed for decades.
Rules and laws can change several times a year.
Accounting principles and practices have existed for decades.
Rules and laws can change several times a year.
Get free information to help you understand the basics of business accounting:
- how it works
- how it fits together
- why things are done like they are
- what you need to know
- how it works
- how it fits together
- why things are done like they are
- what you need to know
WHAT IS ACCOUNTING?MORE THAN NUMBERS
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HISTORY OF ACCOUNTING
Question 2
ACCOUNTING PRINCIPLES, STANDARDS AND RULES
WHAT ARE ACCOUNTING PRINCIPLES?
WHAT ARE ACCOUNTING STANDARDS?
what is gaap?
GAAP is an acronym that means 'Generally Accepted Accounting Principles'.
These are principles that form the foundation of accounting practice and, as the name suggests, are generally accepted across the profession and across jurisdictions.
These are principles that form the foundation of accounting practice and, as the name suggests, are generally accepted across the profession and across jurisdictions.
What is NZ IFRS?
IFRS is an acronym that means 'International Financial Reporting Standards'.
NZ IFRS are those that were implemented in NZ accounting.
IFRS came into effect in the early 2000s and were developed in response to the Enron scandal of 2001. The NZ IFRS came into affect in the 2005 year.
They apply to specific companies and new ones are written and released regularly. If your business is subject to IFRS, you need to talk to a suitably trained accounting professional.
For more information about IFRS, click on this link.
NZ IFRS are those that were implemented in NZ accounting.
IFRS came into effect in the early 2000s and were developed in response to the Enron scandal of 2001. The NZ IFRS came into affect in the 2005 year.
They apply to specific companies and new ones are written and released regularly. If your business is subject to IFRS, you need to talk to a suitably trained accounting professional.
For more information about IFRS, click on this link.
ACCOUNTING SPECIALITIES
TYPES OF ACCOUNTING SPECIALITIES
Like a lot of professions, the accounting profession has a multitude of specialities within it.
The specialities can range from day-to-day transactional processing, through bookkeeping, taxes, reporting, analysis and advisory, auditing, to the most complex roles involving stock market reporting, investment analysis, and company mergers and acquisitions.
There is also fraud investigating and forensic accounting, liquidation specialists and restructure specialists.
The specialities can range from day-to-day transactional processing, through bookkeeping, taxes, reporting, analysis and advisory, auditing, to the most complex roles involving stock market reporting, investment analysis, and company mergers and acquisitions.
There is also fraud investigating and forensic accounting, liquidation specialists and restructure specialists.
DIFFERENT ACCOUNTANTS
Also like a lot of professions, accountants can specialise in particular areas.
Across the world, there are many accounting institutes who train accountants in their specialist fields and many membership organisations to further categorise expertise and knowledge.
In NZ, the institute is CAANZ - the Chartered Accountants Australia and NZ.
In the UK, there is ICAEW, ICAS, ACCA, CIMA and CIPFA.
In Australia, there is CAANZ, CPA and IPA.
To understand what each specialises in, and how that relates to the needs of your business, it's best to speak to an accountant with knowledge of each.
Across the world, there are many accounting institutes who train accountants in their specialist fields and many membership organisations to further categorise expertise and knowledge.
In NZ, the institute is CAANZ - the Chartered Accountants Australia and NZ.
In the UK, there is ICAEW, ICAS, ACCA, CIMA and CIPFA.
In Australia, there is CAANZ, CPA and IPA.
To understand what each specialises in, and how that relates to the needs of your business, it's best to speak to an accountant with knowledge of each.
WHO TO CHOOSE: ACCOUNTANT OR BOOKKEEPER?
Like most answers to accounting questions, the answer is 'it depends'.
It depends on what your business is and what obligations it has. It also depends on the knowledge you or your staff already have and how much you need someone else to do.
A bookkeeper will be able to do a lot of the requirements of a micro or small business, including filing tax returns.
For more complex accounting requirements, like completing a full set of financial statements, an accountant is needed.
It depends on what your business is and what obligations it has. It also depends on the knowledge you or your staff already have and how much you need someone else to do.
A bookkeeper will be able to do a lot of the requirements of a micro or small business, including filing tax returns.
For more complex accounting requirements, like completing a full set of financial statements, an accountant is needed.
THE IMPORTANCE OF QUALIFICATIONS
Having spent about 6 years studying and learning and taking (and passing!) exams, I do very much value the knowledge gained from undertaking formal training and recognised professional qualifications.
But, the term 'accountant' is not a protected term and anyone can call themselves an accountant.
There are just a few specific areas that are legally required to be completed by someone who is a qualified member of a recognised accounting institute.
Someone who has been doing accounting for years and has excellent experience is just as likely to be able to help you with your business accounting as someone who also has the formal training and qualifications.
But, the term 'accountant' is not a protected term and anyone can call themselves an accountant.
There are just a few specific areas that are legally required to be completed by someone who is a qualified member of a recognised accounting institute.
Someone who has been doing accounting for years and has excellent experience is just as likely to be able to help you with your business accounting as someone who also has the formal training and qualifications.
DO I NEED A QUALIFIED ACCOUNTANT?
It really depends on what you need to be done and how you view the value of qualifications.
As stated above, there are a few areas that only a qualified member of a recognised institute are able to perform but, other than that, it is up to you.
In support of qualifications, I would say:
- formal qualifications are exactly that, formal qualifications. A programme of study has been developed and approved, and professionally delivered to its students.
- someone who is a member of a recognised institute is obliged to follow the rules of that institute as well as the general rules of accounting. This includes abiding by the code of ethics. In addition, there is redress to the institute if the accounting member fails in their obligations, and the institutes can - and do - reprimand or even dismiss members.
As stated above, there are a few areas that only a qualified member of a recognised institute are able to perform but, other than that, it is up to you.
In support of qualifications, I would say:
- formal qualifications are exactly that, formal qualifications. A programme of study has been developed and approved, and professionally delivered to its students.
- someone who is a member of a recognised institute is obliged to follow the rules of that institute as well as the general rules of accounting. This includes abiding by the code of ethics. In addition, there is redress to the institute if the accounting member fails in their obligations, and the institutes can - and do - reprimand or even dismiss members.
TAX AGENTS
Tax agents are taxation specialists who have a special relationship with the tax authority (the NZ Inland Revenue).
Much like bookkeepers and accountants, no formal qualifications are required for someone to call themself a tax agent.
Those who do tax returns for others don't need to register as tax agents until they reach a level of 10 or more clients, and then they can register with the IRD and receive specific support from the IRD. More information is on the IRD website.
Much like bookkeepers and accountants, no formal qualifications are required for someone to call themself a tax agent.
Those who do tax returns for others don't need to register as tax agents until they reach a level of 10 or more clients, and then they can register with the IRD and receive specific support from the IRD. More information is on the IRD website.
INTRODUCING ACCOUNTINGIT'S NOT JUST ABOUT TAX
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STRUCTURE OF ACCOUNTING SYSTEMS
WHAT IS THE STRUCTURE OF ACCOUNTING?
A set of accounts is compiled from a series of ledgers. Some ledgers are known as Primary Ledgers.
The ledgers link to each other and to a central ledger known as the general ledger (or GL), which contains the information from which the compliance reports are created.
Whilst computer software systems are designed to be user-friendly and focus on the day-to-day transactional processing without necessarily referring to 'ledgers', the accounting structure of ledgers is working behind the scenes.
The ledgers link to each other and to a central ledger known as the general ledger (or GL), which contains the information from which the compliance reports are created.
Whilst computer software systems are designed to be user-friendly and focus on the day-to-day transactional processing without necessarily referring to 'ledgers', the accounting structure of ledgers is working behind the scenes.
WHAT IS DOUBLE-ENTRY BOOKKEEPING?
The practice of double-entry bookkeeping is - to my mind - a remarkable concept that ensures all transactions are captured and recorded, and the principle that is it self-balancing result is a key feature of good practice.
It works on the basis that each transaction should have two parts and that, when accumulated, all the parts balance.
The two parts are known as debits and credits.
You can never have two debits in one transaction, nor two credits.
Most often, of the two parts (one debit and one credit), one will be in the Profit and Loss account (P&L) and the other in the Balance Sheet (B/S). (It is possible to have the two parts of a transaction in one or other report together, but these are specific situations.)
In order to balance the P&L with the B/S, the net profit or loss becomes part of the equity section of the B/S.
To check that the debits and credits match across the whole accounting system, the Trial Balance (TB) report can be run.
With software systems, the double-entry aspect is automatically taken care of.
In recent years, I haven't been asked to supply a copy of the Trial Balance report.
It works on the basis that each transaction should have two parts and that, when accumulated, all the parts balance.
The two parts are known as debits and credits.
You can never have two debits in one transaction, nor two credits.
Most often, of the two parts (one debit and one credit), one will be in the Profit and Loss account (P&L) and the other in the Balance Sheet (B/S). (It is possible to have the two parts of a transaction in one or other report together, but these are specific situations.)
In order to balance the P&L with the B/S, the net profit or loss becomes part of the equity section of the B/S.
To check that the debits and credits match across the whole accounting system, the Trial Balance (TB) report can be run.
With software systems, the double-entry aspect is automatically taken care of.
In recent years, I haven't been asked to supply a copy of the Trial Balance report.
COMPARING TYPES OF ACCOUNTING
DID YOU KNOW THERE ARE A VARIETY OF TYPES OF ACCOUNTING?
Much like other professions, there are multiple types of accounting, and the general term can cover a wide range of specialities.
I look at a few of the key types and differences below.
I look at a few of the key types and differences below.
BOOKKEEPING VS ACCOUNTING
The term bookkeeping generally represents the practice of keeping the books. The books being the source ledgers, that is, those that are front facing, like the sales ledger and purchases ledger.
Bookkeeping can also involve compliance requirements (particularly related to taxes) and ensuring that transactions meet accounting standards and principles.
Accounting includes bookkeeping and compliance requirements, and can extend to full compliance reporting, adherence to more technical accounting standards and business analysis and advice.
Accounting also includes the speciality of auditing, which only recognised qualified accountants are able to undertake.
Bookkeeping can also involve compliance requirements (particularly related to taxes) and ensuring that transactions meet accounting standards and principles.
Accounting includes bookkeeping and compliance requirements, and can extend to full compliance reporting, adherence to more technical accounting standards and business analysis and advice.
Accounting also includes the speciality of auditing, which only recognised qualified accountants are able to undertake.
COMPANY VS TAX ACCOUNTING
Company accounting and tax accounting are not the same thing, although they often cross-over.
Accounting is generally governed by accounting principles and accounting standards. Many standards are common across the world.
Tax accounting is generally governed by the taxation authority, in our case the NZ Inland Revenue.
Notable differences occur in the following areas:
- the profit or loss of a company is not the same as the taxable profit or loss
- depreciation of fixed assets can be calculated using 'book' values if they are more accurate or relevant to the company, for tax calculations though, they must be adjusted to meet tax depreciation requirements
- expenses that relate to people (e.g. coffee meetings, staff events, uniforms) are company expenses, but specific rules apply in relation to their amount that can be claimed for tax
When thinking about expenditure, it is useful to appreciate whether your concern is in relation to business accounting or to tax accounting.
Accounting is generally governed by accounting principles and accounting standards. Many standards are common across the world.
Tax accounting is generally governed by the taxation authority, in our case the NZ Inland Revenue.
Notable differences occur in the following areas:
- the profit or loss of a company is not the same as the taxable profit or loss
- depreciation of fixed assets can be calculated using 'book' values if they are more accurate or relevant to the company, for tax calculations though, they must be adjusted to meet tax depreciation requirements
- expenses that relate to people (e.g. coffee meetings, staff events, uniforms) are company expenses, but specific rules apply in relation to their amount that can be claimed for tax
When thinking about expenditure, it is useful to appreciate whether your concern is in relation to business accounting or to tax accounting.
CASH VS ACCRUAL ACCOUNTING
Cash accounting relates to transactions that have occurred with cash or banking transactions.
Personal accounting and personal tax accounting is generally based on a cash accounting basis.
It is unlikely for a company to use cash accounting (although it is possible in certain circumstances).
Cash accounting is fairly straightforward as it relates to cash/banking transactions and when they happen.
Accrual accounting is based on accounting principles.
It relates to recording liabilities and assets - things that may not as yet have had a cash/banking effect.
Accrual accounting is deemed to create a more accurate picture of the health of a business.
There are more accounting standards that are applied to a set of accounts, and that takes more knowledge and more transactional time.
Personal accounting and personal tax accounting is generally based on a cash accounting basis.
It is unlikely for a company to use cash accounting (although it is possible in certain circumstances).
Cash accounting is fairly straightforward as it relates to cash/banking transactions and when they happen.
Accrual accounting is based on accounting principles.
It relates to recording liabilities and assets - things that may not as yet have had a cash/banking effect.
Accrual accounting is deemed to create a more accurate picture of the health of a business.
There are more accounting standards that are applied to a set of accounts, and that takes more knowledge and more transactional time.
COMPLIANCE VS MANAGEMENT ACCOUNTING
Compliance accounting covers the situations and reporting that is required by accounting standards and/or legislation.
It requires the accounts person to know all the rules and regulations for transactional processing and the reports are in a proscribed structure.
Management accounting relates to accounting that is for management purposes.
It is less governed by statute or legislation and looks to provide useful and appropriate information for managers when making decisions for their own business.
It covers a range of practices that have been built up over generations.
It requires the accounts person to know all the rules and regulations for transactional processing and the reports are in a proscribed structure.
Management accounting relates to accounting that is for management purposes.
It is less governed by statute or legislation and looks to provide useful and appropriate information for managers when making decisions for their own business.
It covers a range of practices that have been built up over generations.
FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING
Financial accounting is generally regarded as the historical recording of operations and transactions.
It reports what has happened and has a huge element of compliance within it.
Bookkeeping and tax returns are usually part of financial accounting.
Management accounting is more focused on the financial operations of the company and is more tailored to information that is useful to the managers when making decisions for the future.
It includes accounting practices such as costing, budgeting, and analysis.
It reports what has happened and has a huge element of compliance within it.
Bookkeeping and tax returns are usually part of financial accounting.
Management accounting is more focused on the financial operations of the company and is more tailored to information that is useful to the managers when making decisions for the future.
It includes accounting practices such as costing, budgeting, and analysis.
ACCOUNTING TERMINOLOGYKEY JARGON
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TRANSACTIONAL TERMS
WHAT IS THE CHART OF ACCOUNTS?
The Chart of Accounts (CoA) is a list of categories that make up the structure of your business accounts, meeting the compliance reporting requirements.
It is generally seen as a list of items against which transactions are allocated and relate to the previous structures of ledgers.
The Chart of Accounts for a company is structured into segments such as Income, Cost of Sales, Expenses, Assets, Liabilities, Fixed Assets and Equity and there are various individual items within each segment.
Software systems will be structured in the same or similar way and numerical codes are used to keep similar items within segments.
e.g. in MYOB, sales items have numerical codes beginning with 4. In Xero, sales items have numerical codes beginning with 2.
Provided that the main segmental structure is maintained, it is possible to add categories/numerical codes for whatever analysis your business requires.
Each individual category/numerical code may also be called an account code, but client/supplier accounts may also be given an account code, so be careful which you mean when talking about codes.
It is generally seen as a list of items against which transactions are allocated and relate to the previous structures of ledgers.
The Chart of Accounts for a company is structured into segments such as Income, Cost of Sales, Expenses, Assets, Liabilities, Fixed Assets and Equity and there are various individual items within each segment.
Software systems will be structured in the same or similar way and numerical codes are used to keep similar items within segments.
e.g. in MYOB, sales items have numerical codes beginning with 4. In Xero, sales items have numerical codes beginning with 2.
Provided that the main segmental structure is maintained, it is possible to add categories/numerical codes for whatever analysis your business requires.
Each individual category/numerical code may also be called an account code, but client/supplier accounts may also be given an account code, so be careful which you mean when talking about codes.
WHAT DOES 'codING' MEAN?
The term coding is used when a transaction is allocated its category/numerical code in the chart of accounts (CoA).
When it is processed in software, the transaction has a field to select the category/numerical code/CoA code, and the values will be attributed to that place in the chart of accounts.
In order to maintain double-entry bookkeeping, the contra coding entry will be taken care of automatically by the software.
When it is processed in software, the transaction has a field to select the category/numerical code/CoA code, and the values will be attributed to that place in the chart of accounts.
In order to maintain double-entry bookkeeping, the contra coding entry will be taken care of automatically by the software.
what does 'posting' mean?
The term posting is similar to confirming or finalising.
It is the recording of a transaction in your accounts, and events that are based on time and on value are triggered at that point.
In software systems, up until the point the transaction is approved or entered, the transaction is unposted - it may be in draft - and it is not included in the accounting records.
It is the recording of a transaction in your accounts, and events that are based on time and on value are triggered at that point.
In software systems, up until the point the transaction is approved or entered, the transaction is unposted - it may be in draft - and it is not included in the accounting records.
WHAT DOES 'RECONCILIATION' MEAN?
The term reconciliation reflects the bringing together of two individual parties to the same point.
In accounting, it represents bringing together or matching the separate parts of the accounting system such that they are in agreement.
For example, a bank reconciliation brings together (matches) the transactions recorded in the accounting records with the transactions recorded in the bank account. Its purpose is to ensure that each system has the same transactions recorded, and those that appear in one system but not the other are called 'reconciling items'.
Reconciling items in the bank reconciliation are fewer these days with the advent of direct bank credits which occur on the same day.
In the times of cheques and over-the-counter deposits, there would be a timing delay between the accounting records and the bank records and these were the reconciling items.
Reconciling items still occur with GST returns that use the payables basis. The mismatch of timing between the cash/payables transaction and the recording of GST in the accounts on the accruals basis, can give rise to reconciling items.
TIP: If you use the payables basis for your GST return, you should be doing a GST reconciliation regularly to ensure that your GST returns are correct.
In accounting, it represents bringing together or matching the separate parts of the accounting system such that they are in agreement.
For example, a bank reconciliation brings together (matches) the transactions recorded in the accounting records with the transactions recorded in the bank account. Its purpose is to ensure that each system has the same transactions recorded, and those that appear in one system but not the other are called 'reconciling items'.
Reconciling items in the bank reconciliation are fewer these days with the advent of direct bank credits which occur on the same day.
In the times of cheques and over-the-counter deposits, there would be a timing delay between the accounting records and the bank records and these were the reconciling items.
Reconciling items still occur with GST returns that use the payables basis. The mismatch of timing between the cash/payables transaction and the recording of GST in the accounts on the accruals basis, can give rise to reconciling items.
TIP: If you use the payables basis for your GST return, you should be doing a GST reconciliation regularly to ensure that your GST returns are correct.
WHAT IS A FIXED ASSET?
A fixed asset is something that will help your business earn income over a lengthy period of time (i.e. over one year).
It relates to things like office furniture and equipment, computer systems and buildings. These are called tangible assets.
It can also relate to software purchases, goodwill and some intellectual property (like training programmes). These are called intangible assets.
Tangible assets are depreciated and intangible assets are amortised.
The process of depreciation essentially allocates the benefit of the item across the years it will help you earn from it.
There are specific rules for depreciation (and amortisation), and book depreciation is different to tax depreciation.
It relates to things like office furniture and equipment, computer systems and buildings. These are called tangible assets.
It can also relate to software purchases, goodwill and some intellectual property (like training programmes). These are called intangible assets.
Tangible assets are depreciated and intangible assets are amortised.
The process of depreciation essentially allocates the benefit of the item across the years it will help you earn from it.
There are specific rules for depreciation (and amortisation), and book depreciation is different to tax depreciation.
HOW DO i KNOW IF SOMETHING IS A FIXED ASSET?
Many fixed asset items are easy to identify - chairs, tables, a laptop.
Smaller and cheaper items may not be so easy to categorise, which is why the tax depreciation rules are usually used. These rules assign a $ value to items and expenditure under this $ value are not necessary to be classified as fixed assets.
TIP: When coding transactions, it is good to remember that fixed assets are part of the balance sheet and will have numerical codes that are balance sheet codes. Sometimes the wording of account codes may be misleading and relying on the wording may mean you have mis-coded your transaction e.g. 'computer purchases' does not easily identify if it is a fixed asset account or an expense account.
Smaller and cheaper items may not be so easy to categorise, which is why the tax depreciation rules are usually used. These rules assign a $ value to items and expenditure under this $ value are not necessary to be classified as fixed assets.
TIP: When coding transactions, it is good to remember that fixed assets are part of the balance sheet and will have numerical codes that are balance sheet codes. Sometimes the wording of account codes may be misleading and relying on the wording may mean you have mis-coded your transaction e.g. 'computer purchases' does not easily identify if it is a fixed asset account or an expense account.
Financial statements
Chart of Accounts
Profit and loss account
Income
Direct expenses
Indirect expenses
Balance sheet
Bank
Assets
Liabilities
Equity
Shareholders
Payroll
Accounts receivable
Accounts payable
Stock/ inventory accounting
General ledger
Chart of Accounts
Profit and loss account
Income
Direct expenses
Indirect expenses
Balance sheet
Bank
Assets
Liabilities
Equity
Shareholders
Payroll
Accounts receivable
Accounts payable
Stock/ inventory accounting
General ledger
REPORTING TERMS
TERMS ON A PROFIT AND LOSS REPORT
TERMS ON A BALANCE SHEET
Question 2
practical tipsREAL-LIFE EXPERIENCES
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ADDITIONAL RESOURCESGET EXTRA HELP
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If anything in this section applies to your business and you'd like my specific help, please go the Paid Guidance section of this website, or contact me via the details below.
LEGAL STUFF
By the very nature of our profession, any advice or guidance given on this website or in open training resources are general and generic in nature. The majority of my focus is on better business practices and knowledge.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
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