Legal obligation
Every entrepreneur is legally obliged to conduct a proper financial administration.
Proper financial administration
In general a proper financial administration means registration of the assets, equity and liabilities (on the balance sheet), revenues and expenses (on the profit and loss statement) and receipts and payments (in the cash flow statement).
In order to be able to produce these reports it’s necessary to keep track of all transactions (records) in a general ledger. Some general ledger accounts will often be supported by a sub-ledger. Outstanding amounts to be received or paid will be registered in an accounts receivable and accounts payable sub-ledger. Tangible and intangible fixed assets are also registered in a sub-ledger. Manufacturing companies also have a sub-ledger for inventories and work in progress.
Accountant
Most small businesses and self-employed personnel outsource conducting a proper financial administration to an accountant / bookkeeper). For this many reasons can be given, however the most important ones are probably:
- Lack of time
- Insufficient knowledge
- Need for advice
- Lack of interest
Auditor
An auditor is specialized in auditing financial administrations. Often an auditor will only become involved when a company is obliged to publish an annual report which then is publicly available for all stakeholders. In that case it’s important all stakeholders can rely on the accuracy of the annual report. In general the costs for hiring an auditor are much higher than the costs for an accountant / bookkeeper while it’s quite often heard that the service provided is less. Therefore small businesses are often better off with an accountant / bookkeeper. Also when the business is obliged to publish an annual report. However, an auditor does have to audit the financial administration and approve the annual report.
