The term accounting is not uncommon, especially when it comes to the tax season. However, before delving into the importance of accounting when running a business, let us look into the basics.
What is accounting?
Accounting simply refers to the work or process of keeping financial records. It entails the systematic & detailed recording of a business’ financial transactions. There are various types of accounting, including accounting for small businesses, forensic, government to accounting for corporations, and even management accounting.
Why Accounting is Important
Accounting plays a crucial role in running a business or company as it helps you track expenditures and income, ascertain statutory compliance, and provide the government, management, and investors with quantitative financial information that can be used in making important business decisions.
3 primary financial statements are derived from your records:
1. The Income Statement- this provides you with information regarding profit and loss.
2. The Balance Sheet- this lends a clear picture of a company’s financial state at a given date.
3. The Cash Flow Statement- This acts as a bridge between the balance sheet and the income statement and shows the money spent and generated during a particular period of time.
It’s imperative to keep your financial records up to date and clean if you want your company to succeed. That being said, here are some of the reasons accounting is vital for your business, regardless of the size.
1. Helps in Assessing a Business’ Performance
Financial records show the operations’ results of your business and also its financial position at a given date. Simply put, they help you comprehend what is going on with your company, financial wise. Clean and up to date financial records will not only help you keep track of expenses, possible debt, and gross margin but also help with the comparison of current data with the past accounting records. Ideally, it helps allocate your budget accordingly. Your Accountant or Tax agent should be able to assist with this
2. Ascertains Statutory Compliance
Laws and regulations vary from place to place, but ideal accounting processes and systems help ascertain statutory compliance when it comes to your business. Proper accounting will make sure liabilities like VAT, income tax, sales tax, pension funds, etc., are well addressed.
3. Helps in Filing Financial Statements
Every business is expected to file its financial statements with the Registrar of Companies. As for listed entities, they need to file them with the stock exchange and for direct and indirect tax filing reasons as well. Simply put, accounting plays a vital role in these situations.
4. Helps Create Budget & Future Projections
Future projections and budgeting can make or break your venture, and your accounting process and systems will play a vital role when it comes to it.
Business projections and trends are often based on previous financial data to keep your ventures profitable. However, this data is only usable when provided by proper accounting processes.
As you can see, many aspects make accounting absolutely crucial for a business. As such, it is important to ensure you have the right accountant and well-structured accounting systems/processes.