Simplicity - The Bottom Line

Welcome to our new blog, 'The Bottom Line'. During the course of this series of weekly blog posts we aim to address some of the key accounting & finance issues facing Irish small and medium enterprises today, however, in line with our firm's core value of understanding, will do so in a way which is accessible to all. We will strive to explain some of the most complex concepts in the area of accountancy in a clear and concise manner. Please feel free to comment below or reach out to us with any accounting or finance related questions, queries or concerns you may have about your business that you would like explained in a simple, comprehensible way. 'Simplicity is the ultimate sophistication' (Leonardo da Vinci), and as such we aim to increase your understanding using simple articles, grounded in integrity and trust. 

During this post, we will delve into each of the three main pillars of accounting and finance that our firm focuses on, and provide a high level understanding of each. In the coming weeks, we will expand further into each pillar individually, and then move to address some key areas of relevance in each category.

Financial Accounting
When someone thinks of an accountant, this is usually what comes to mind. Financial Accounting is the process of preparing end of year financial statements, usually in a statutory format. This set of financial statements or 'accounts' is made up of two essential elements, the Income Statement (also known as the Profit & Loss Account) and the Statement of Financial Position ( also known as the Balance Sheet). The income statement is a sum total of all the transactions and activities of the business during the year, for example sales, purchases, wages etc. It sums all of this income and expenditure, and arrives at a profit or loss figure. The Statement of Financial Position on the other hand acts as a picture of the business on a given date, ie. the year end date. It outlines all of the assets and liabilities of the business, as at that given day, for example buildings, motor vehicles, stock on hand, cash, etc. along with loans, hire purchase agreements, creditors, etc. In simple terms, the statement of financial position is a sum total of everything which a business owns, and everything which it owes. The difference being reflected as an amount that owed to or from it's owners, the Capital Account. Financial Accounting is the process of preparing this set of financial statements. All of the activities of the business during the year are analysed, summed, and the results are a set of accounts which reflect a true and fair view of the company for the year in question. 

Tax
Tax is an expansive area of accounting, and permeates all areas of everyone's life. Whether we are working, buying groceries, selling a house, or even giving something away for free, every single transaction will be impacted in some form by a tax. As accountants, it is our duty to assist with the interpretation of the Irish tax legislation, and applying it to the individual case of the client in question. Contrary to popular belief, the computation of taxes is actually a different discipline to the activities of financial accounting described above. For example, in the case of Corporation Tax ( a tax on Company profits) or Income Tax on a sole trader ( the income tax applied to the profits of a self employed person) require a set of accounts as above to be prepared. The results of that are then used in a completely separate computation in order to calculate the taxes owed. There is a plethora of different taxes however which touch every area of both our business and personal lives. VAT for example is an indirect tax levied on almost all goods and services sold. While you may think that this tax is collected by Revenue ( the state department responsible for taxation in Ireland), it is actually gathered by the businesses which supply the goods and services, then remitted to Revenue by them. Similarly, the taxes on your employment are calculated and deducted by your employer, then paid over to Revenue by them. The Irish tax system places a high level of responsibility on our businesses to collect most taxes on behalf of the Revenue, and if they do not comply or make errors in calculating these taxes, serious fines and penalties can be imposed. We hope to explore the vast area of tax for both businesses and individuals over the course of this series, and make sense of some more convoluted and complex issues. 

Financial Management
Similar to tax, this is another exceptionally broad area of accounting and in my opinion one that is under-utilised by most Irish accountants. The two areas discussed above are probably the main pillars for most accounting firms in Ireland, along with statutory auditing (a further area within Financial Accounting which will be discussed in depth in a later post). Financial Management however, is a vast area that is becoming increasingly important in today's business landscape. It involves the ongoing  monitoring, controlling, forecasting and reporting on various financial metrics within a business. It allows management to better plan and implement strategies, both long and short term, based on solid financial information. In essence, Financial Management is simply the activity of looking after a business from a finance perspective, and moving towards more informed decision making by attaching the numbers to the physical activities of the business. Furthermore, it could extend to bookkeeping, which is the more basic level of recording source documents, ie. invoices, payments etc. in order to form the base information for the all of the activities above. Mostly, the more advanced financial management function is carried out by the Chief Financial Officer in large businesses, and often times not at all in smaller ones due to the prohibitive cost and commitment of hiring an internal accountant. There are some firms however, like us, who provide an outsourced CFO function to businesses which are not large enough to employ a full time financial officer, but have reached a stage where they are too large to keep operating without expert financial guidance. You can learn more about this here: https://jesinnott.ie/outsourced-cfo-appointments.html . The topic of Financial Management is  expansive, and over the course of this series we aim to delve deeper into the various issues within this field which are most relevant to you. 

 We hope that you enjoyed this brief introduction to our new blog, and look forward to hearing your questions and queries, which we will address in our upcoming posts. If you'd like to get in touch, you can simply comment on this post, or drop us an email at [email protected] .
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