Most of you must have heard about the term accounting at least once in your lifetime. We come across this word quite often, especially during the tax season. You know you have to do accounting to avoid IRS penalties and audits. How will you know about your company’s financial health without accounting? Your business will go into the dark without being able to take accurate financial decisions.
So, how is accounting helping you in your business? Or in other words, why is accounting so crucial for business? Before answering the above questions, let’s first understand what accounting is.
Accounting is the detail-oriented and structured recording of the financial transactions of a business. They are of many types – government, small business and forensic accounting, management accounting and corporation accounting. Companies cannot function without accounting as it ensures statutory compliance, helps track income and expenditure and provides financial information to investors, government and management to help make business decisions.
Importance of Accounting in Business
Accounting and businesses go hand-in-hand. One cannot survive without the other. But why? Here is the answer to your question.
Accounting keeps you organised
Accounting determines the financial health of your business. With so many things in your head, you could easily forget how much money you have spent and your current profit and loss compared to the previous quarters. You will lose the account of customers who haven’t paid you or debts you have to pay back. And if you are into accrual accounting, you must clearly understand your accounts receivable and accounts payable.
In short, accounting shows you a mirror image of the financial dealings of your businesses. By filing your tax returns accurately and legally, accounting helps you remain organised.
It supports your tax return claims
Most business owners are still unaware of the rules and regulations of tax return filings. Sometimes they even don’t know where to start. Under such circumstances, accounting comes in handy. The first step in filing your tax returns is collecting financial records. You can’t get the correct numbers on your returns without these records. The second part of tax return filing is auditing which most business owners fear. But with proper accounting, you can show them that you have completed all your tax returns paperwork and have all the essential documents.
Accounting makes you responsible
Only you are responsible for the success of your business. Your shareholders can analyse the financial status of your company by going through your accounting records. They prefer seeing the data to hearing from someone else. An up-to-date financial statement validates your business growth. Moreover, accounting also helps employees be more responsible for their profession. With proper accounting activities, they can remain updated on things like performing trial balances, reconciling bank statements, etc. You can always identify the malpractices happening in your company at an early stage.
Helps in decision-making
Your accounting records play a significant role in decision-making on business-related issues. Whether you want to buy a new printer for the office or want to cut down on the expenses happening inside the company, everything depends on your financial records. It gives you a clear picture of how much you are spending and how much is left with you or whether you are in a state to make new expenses or not. Up-to-date accounting records save your business from making some common mistakes like plateauing, underspending, overspending, etc.
Develop new strategies to enhance the business growth
If you are running a small business and want to bring some changes to it, you should conduct a risk analysis before moving ahead with your decision. It will help you understand whether taking that risk is worthy or not. What happens after taking that risk? It would help if you analysed the effects of your action. Accounting is the right way to derive a conclusion. Accounting records will show your business’s expenses, and revenue before and after the change was introduced; you can analyse them by comparing the data. It will give you an overall idea of whether your business strategy was a hit or flop.
Quickly get investment loans
Your investors are not fools to trust you blindly and give you their hard-earned money just like that. They want to see your company’s performance in the previous years. After all, they want to invest their money in something which will be beneficial for them. They will be looking into your accounting books before lending you the money. Your financial statements are proof of your company’s profitability. You can’t file claims or look for investors without organised accounting books, economic forecasts, financial statements and profitability.
Mandatory in business functioning
You don’t have a choice when it comes to accounting in business. Accounting and business are both sides of a coin. One cannot function without the other. Of course, you will have the choice to choose the way you want to do accounting for your business. You and your teammates can decide if you wish to outsource your accounting or do it all by yourself using accounting software. The IRS wants you to follow a business pattern and accounting method. Otherwise, your business tax returns won’t be accurate. It can lead to IRS audit red flags and penalties.
Apart from maintaining an organised accounting book, you should also follow the rules mentioned in the accounting rulebook, also known as generally accepted accounting principles(GAAP).
Accounting is an integral part of the business. Nothing is complete without the other. If you are into business and want to maintain proper accounting, there are some things you need to keep in mind. Follow an accounting method. It can be hybrid, cash-basis or accrual accounting. Maintain accurate accounting records. You can use accounting softwares to record financial transactions. Create a budget after analysing your logs. Keep protective systems like bank statement reconciliation, trial balance, etc., in place.
As wise people said earlier, you can succeed in any field only through hard work. Business is no different. Don’t let your laziness come in between maintaining a good accounting book. For all accounting-related queries and certification courses, visit the official website of Finprov learning, India’s leading accounts education provider.