To answer this question, we need to understand the accounting cycle and the process of manual accounting first. When you are doing accounting for a business manually, you need to go through the entire accounting cycle in a step-by-step process to prepare the business financial statements.
What is accounting cycle?
Accounting cycle is a series of account-related processes which shows how accounting transactions of a business is recorded in its book.
The diagram below shows the process of an accounting cycle in a step-by-step process.
As you can see from the above diagram, there are a total of nine steps which you need to observe or go through to account for business income, expenses and the resulting profit or loss each year. Each year all businesses whether it is a sole trader, partnership or a limited liability company, are recording their business transactions by completing the accounting cycle for twelve months to find out whether they are making a profit or loss. At the end of each year, they must close their income and expense accounts and carry forward their assets, liabilities and owner’s equity accounts to the next financial year to start all over again.
How does the accounting cycle is used in MYOB, Xero and other computerised accounting software?
Well, MYOB, Xero and all other accounting software use the exact same accounting cycle processes to do the business accounts and produce all financial statements. However, the problem with the accounting software is that all the nine-step processes outlined in the accounting cycle is automatically completed behind the scene. Imagine this, you enter one single transaction into MYOB or Xero and from that one transaction, your journal is created, posted to the relevant, ledger/s, your financial statements are prepared and your profit/loss and GST are accounted for you all automatically behind the scene. Now if you know the basic accounting such as debits and credits then you can tell that whether the computer has the done the account correctly or not? If yes, then that is fine but if not, then you use your accounting skills to take corrective action to correct your entry and ensure your account is accurately prepared. What if you don’t understand the basic accounting principles and can’t tell whether the computer accounting software has done the account correctly or incorrectly? Then your only option is to blindly follow the computer software face the consequences.
The consequences of inaccurate accounting
Accounting is the back bone of the business and accounting information is the first business tool which managers are using on daily basis to make informed business decision. Whether you hiring a new staff, giving employees a pay rise, buying fixed assets, acquiring new business, increasing or decreasing production, you need accounting information to make those decisions. When people rely on accounting software automation to prepare their accounts and have no accounting background or understanding of the basic accounting, they tend to follow the accounting software blindly and this leads to inaccurate accounting. For example, by overstating or understating your income or expenses, you can cause series damages to your business with devastating consequences.
While MYOB, Xero and other accounting software has made accounting easy and cheap but it doesn’t mean that you can setup the software properly and do the accounts correctly without the basic the understanding and knowledge of accounting. By understating the basic accounting not only you can do your accounts more accurately and efficiently but you also use the accounting information to spot trouble areas of your business early and take corrective action to fix it. You can also utilise your accounting knowledge to identify business opportunities in your business and take advantage of each business opportunity to grow your business further.
MYOB and Xero accounting are highly practical courses and it is not desirable to attempt to learn them without the understanding of the basic accounting. There are hundreds of MYOB, Xero and Payroll training providers who teach accounting software in isolation and in a lecture format with no practical use of software whatsoever. You will get an attendance certificate and that is about it. If you really want to learn MYOB, Xero, Payroll or any other accounting software for that matter, then make sure the course you sign up for provides both accounting and software as a one package training otherwise you are wasting your time and money. Don’t forget that you are using accounting software to do the accounts for business. To do the accounts for a business, people often study 7 years at high school and university before they can call themselves accountant and can do accounting for a business. However, with advancement of technology and automation process, you can do the accounting for a business using accounting software like MYOB & Xero without having previous accounting knowledge or the software provided you are ready to learn the very basic accounting, in particular; the basic double entry accounting. Since 2011, I have successfully thought MYOB, Xero and Payroll to hundreds of business owner’s and other individuals who had no previous accounting, MYOB, Xero or Payroll. All my MYOB, Xero and Payroll courses automatically covers the basic accounting principles as well as the double entry accounting system regardless of whether you have accounting background or not. The bottom line is that you can’t learn MYOB, Xero or Payroll in isolation and without practical accounting practice.