Taking Charge of Your Business’s Accounting Policies - dummies

Taking Charge of Your Business’s Accounting Policies

As a business manager, you should get involved in setting your company’s accounting policies. Business managers should take charge of accounting decisions just like they take charge of marketing and other key activities of the business.

You may have heard the adage that war is too important to be left to the generals. Well, accounting is too important to be left to the accountants — especially when choosing which accounting methods to use.

Measuring profit and putting values on assets and liabilities boils down to choosing between conservative accounting methods and more liberal (or aggressive) methods. Conservative methods record profit later rather than sooner; liberal methods record profit sooner rather than later. It’s a “pay me now or pay me later” choice.

Some business managers defer to their accountants in choosing accounting methods for measuring sales revenue and expenses. Don’t! You should get involved in making these decisions. The best accounting method is the one that best fits the operating methods and strategic plan of your business. As the manager, you know the business’s operations and strategy better than your accountant.

Many businesses choose conservative accounting methods to defer paying their income tax. Keep in mind the following:

  • Higher expense deductions in early years cause lower deductions in later years.

  • Conservative, income tax-driven accounting methods make the inventory and fixed assets in your balance sheet look anemic.

  • Recording higher cost of goods sold expense takes more out of inventory, and recording higher depreciation expense causes the book value of your fixed assets to be lower.

Nevertheless, you may decide that deferring the payment of income taxes is worth it, in order to keep your hands on the cash as long as possible.