What are the benefits of keeping proper accounting records?

Answer 1

Staying on top of paperwork can prove to be a headache for some business people who would prefer to concentrate on keeping their business running. However, keeping good accounting records is vital for all kinds of businesses for a number of reasons.

Financial Information: Good financial records give the owner a picture of how much income the business is generating and how it is being spent on goods for resale and on overheads. Over a period, which can be six months or a year, financial statements like the Profit and Loss and Balance sheet can be produced from these records. It is vital to have accurate and up to date records as your financial advisor can then identify the strengths and weaknesses of the business and give advice on how to improve the efficiency and profitability of the business or make changes to improve weaker are

Budgets: A budget is prepared using accurate financial records available to a business owner. Based on these records, future income and expenses can be projected to give direction and focus to the business. A business budget also provides a strong foundation for management to make changes and improvements to the business and generally monitor all areas of the business. The key to successful budgeting is regular reviews of projected values against actual values so that the business owner can make changes in the business accordingly.

Cash flow: A business owner needs to know if he has enough cash to meet financial commitments like paying his creditors or his employees every month. It is important to prepare a cash flow projection to find out if his outgoings are sufficiently covered by his incomings, as that will be the difference between him being solvent or insolvent. Based on what the cash flow statement reveals, the business owner can take appropriate steps to improve his income or reduce his expenditure. Keeping good financial records will help make this forecast easier to implement.

Loans: It is important to have up to date financial statements in case the business owner requires a loan to expand his business. The lender will use information shown on these statements to check out the financial health of the business. In addition, a business plan, which shows how the loan will be used to make the business a successful venture, will be required before business lenders make any decisions. Similarly, any business seeking investment will need to provide good accounting records before any perspective investor decides to part with his money.

Tax Purposes: Every business has to submit a tax return to the tax office to show what its tax implications are. Accurate financial records are necessary so that any over or under payments of tax are avoided. If the businessperson employs people to work for him, he needs to keep accurate records for them so that correct tax and contributions are paid on their behalf to the Inland Revenue. Keeping organized and accurate financial information becomes even more important during audits when the businessperson has to provide proof on the accuracy of his business record keeping.

VAT: In addition to taxes, the business is liable for paying value added tax to the government depending on its income threshold. It is important to read the guidelines required for submitting this tax when the business is set up so that errors that prove costly later are avoided.

Dividends: In companies where part of company's profits are distributed to its shareholders as dividends or for partnerships where both profits and losses have to be shared it becomes vital to keep good financial records