Maintaining accounting records is not only a legal requirement in most of the countries around the world, but it also enables you to make informed decisions on expenditure, controlling your cash flow, planning your investment and a lot more.
Inaccurate bookkeeping is a two-way sword. It affects not only the sustainability of a company but also its stakeholders. The importance of bookkeeping and accounting has increased after the surfacing of big scandals such as the Satyam Scandal or that of Lehman Brothers.
Before moving directly towards the importance of accounting and bookkeeping, let’s have an overview of Accounting and Bookkeeping, individually.
Accounting is a much broader term that involves the recording, summarization, analyzing, and reporting of the financials of a company. It is further divided into different types, including financial accounting, management accounting, and cost accounting.
Bookkeeping is a subset of accounting that involves recording financial transactions and activities on a daily basis. In bookkeeping, all transactions, including expenses, receipts, sales, etc., are all recorded in a general ledger.
Many people think that bookkeeping is another name for accounting. However, that is wrong.
Bookkeeping is a transactional role that involves the simple recording of financial transactions, including sales, purchases, expenses, etc. On the other hand, accounting is a broader term and provides financial insights to the business owners based on the data taken from the bookkeeping.
Accounting and Bookkeeping are the foundation on which your business operations and functions run smoothly. Irrespective of the organization's size, the importance of accounting and bookkeeping remains eternal for companies, startups, and SMEs.
Let’s have an insightful overview of the importance of accounting and bookkeeping.
The following points explain the importance of accounting and bookkeeping for businesses and other organizations:
In many countries, including UAE, the law requires businesses to maintain financial records of previous years. The requirements are categorically stated. Most businesses are required to keep track of five years of financial records. It is to make sure that all transactions were legal, moral and taxed properly.
The importance of accounting becomes evident when you can easily check your company’s financial standings. Your up-to-date book of accounts helps you to monitor your cash flow, working capital, and cash requirements, etc.
Accounting help you with your business’ budget. It makes it easier to review the financial resources and expenses when income and expenses are properly organized.
A budget is your business’ financial roadmap. It helps you to plan future expenses and the anticipated earnings that would cover those expenses.
A proper record of financial accounting not only helps the companies in identifying their financial position but also helps them to compare the company’s performance over the years and the results obtained.
Accountants use various ways to analyze a company. These include the accounting rate of return, earning per share, operating profit and operating margin, debt to equity ratio, inventory turnover, and other financial and non-financial ratios. All these ratios can be interpreted to understand where the company is standing and how it’s performing and what necessary changes are required.
The clean, unbiased, and updated accounting records help you to allocate your budget appropriately.
It is beyond doubt that streamlining budgeting and futuristic goals can either make or break a business. The collective accounting data makes it easier for businesses to prepare budget and forecast for the next years, keeping a particular goal in mind.
A proper record of accounting data in your accounting books helps you to create new policies and make the right decisions in favour of your organization to improve the overall performance of underlying processes.
For example, accounting helps you in devising a policy about the price of products and services and what resources you might need to develop those products or services.
The proper record of accounting and sets of statement of financial position, statement of comprehensive income, statement of cashflow and statement of retained earnings relevant to your business help you face the audits without getting into any trouble.
Accounting helps you to evaluate the current position of your business and gives you an insight into where your business will stand after certain years in terms of finances.
For example, the complete and accurate information of creditors and debtors helps you to evaluate your business’s current standing and what it will be in upcoming years.
With the proper accounting, it becomes easier for you to prepare the financial reports in the form of charts and graphs and present them to the company’s investors and shareholders.
Accurate and complete records of your financial transactions improve the credibility of your business and allow your investors to invest more in your company or business.
The importance of accounting in business is quite high when it comes to tax compliance and keeping track of documents and information for the fulfilment of tax obligations.
Bookkeeping allows you to record your expenses, income, and all other financial data in one place, so you don’t have to rush and find all the bills and gather all your reports while filing your periodic tax return.
Accounting keep track of your business’ profitability and its growth. The income statement of your business, provides you information on whether your business is profitable or not.
If you don’t have such information, it is impossible to know how well your business is doing.
The role of Accounting and Bookkeeping is equally as important as running the day-to-day activities of your business. Perhaps, even more important for the startups that are still under a limited and controlled budget to work on.
Diligence is crucial, and nobody likes to receive unexpected tax penalties because of poor accounting and bookkeeping practices.
At Zaitox, we understand the importance of Bookkeeping and Accounting for your business. That’s why our team of experts is ready to take care of all your financial records. We will use our decades of industry experience to help you in bookkeeping and accounting of your business’ financial transactions.
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