ADVANTAGES OF USING ACCOUNTING IN BUSINESS

While some small business owners prefer to go through root canal operations than do their own accounting, bookkeeping is an essential part of running a business.

TL; DR (Too Long; Not Reading)

The advantages of using accounting in business are linked to the insights provided by numbers. These numbers help you understand what is going well and where there is room for improvement.

 

 

What are the Main Objectives of Accounting?

The main objective of accounting is to keep track of your company’s income and expenses. Revenue is all the money that flows into your business from the sale of goods and services and other types of income, such as interest earned or rent or royalties collected. Expenses are everything your business buys for its operations and infrastructure, such as:

·         material

·         workers

·         rent

·         inventory

·         postal money

·         insurance

·         vehicle expenses

·         professional services

·         advertise

·         equipment

What is the Purpose of an Accountant?

The purpose of your accountant is to summarize the work of your bookkeeper by compiling the ledger into reports. Your accountant can also complete your tax forms and give advice on how best to spend and save your money. You may or may not need to hire a professional accountant, depending on your level of comfort in working with numbers, the complexity of the business and your tax situation.

The purpose of your bookkeeper is to enter receipts and invoices into a database, ledger or spreadsheet so you can keep track of expenses and sales. A large number of bookkeeping systems are computerized because bookkeeping programs can organize and add numbers more quickly and efficiently than manual, handwritten systems. However, you do not need a computer program to create your company bookkeeping. A handwriting system that tracks sales and expenses will also give you the information you need.

You can create your own bookkeeping by monitoring income and expenses and tracking this information in a way that is useful to you and your accountant. The information must be easy to read and understand, and the information must accurately describe the financial activities of your business. Your bookkeeping information will be useful to your accountant as it provides the information needed to compile tax reports and loan documents. The same information can be useful internally to provide insights about your business, such as showing how much of your income comes from wholesale versus retail sales and how much you spend on materials versus labor.

Even if you hire an accountant and bookkeeper to organize your financial information and prepare your tax returns, you still have accounting responsibilities as a business owner. You must keep all the information they need, such as invoices you write and receipts you receive for business purchases you have made. The more organized these documents are when you take them to your bookkeeper and accountant, the less you have to pay for their time. Bookkeepers need longer to organize a shoe box full of receipts than to work methodically through a file with paperwork that has been sorted by date or with a credit card account.

What are the Accounting Rules?

Accounting rules regulate the way expenses and income are entered into the system as debits or credits. This rule regulates double -entry bookkeeping, a system that has been widely used since the late middle Ages. The double entry system not only tracks your income and expenses, but also shows how money and assets move around your company. In a double entry system, each entry entered as a debit must be offset by the corresponding credit and vice versa. An alternative to double -entry bookkeeping is a one -entry system where you simply list and calculate your income and expenses without a built -in protocol to combine these entries with your actual financial situation.

When working with a personal account, someone who transfers assets to the business should be credited, while the recipient, or business, should be debited. This seems contrary to intuition as the funds have left the hands of individuals and have been transferred into the hands of businesses. However, bookkeeping accounts do not always explain the actual cash balance. Instead, they refer to the amount owed or owned. When an individual such as an owner transfers money to a business, the transaction will increase, or give credit, an account and represent the amount that the business must pay to that individual. This same fund transfer results in a debit to the business account because, although cash is available and available, it is now owed to the individual who has provided it.

When dealing with real accounts, such as real estate and machinery, accounting rules require you to debit purchases and new credit items that you have sold or have not used. The asset was originally posted as a debit because you spent money to acquire it. If you sell it or remove it from service after its benefits expire, you will debit or credit an account that represents what you owe on the purchase.

When your business purchases materials or pays rent, accounting rules require you to enter this transaction as a debit. On the other hand, when you sell a product or service, your accounting system treats this transaction as a credit. Purchases that require outgoing funds will reduce your company’s capital, so they are tracked as debits. Income and other profits, such as incoming rent payments, increase your company’s capital, so they are tracked as credit.

While these accounting rules govern how each transaction appears in your bookkeeping system, you don’t actually need to understand and apply them unless you make an entry into the bookkeeping system twice that isn’t programmed to organize your information. For example, if you use a handwritten ledger as the basis of your accounting system, you should decide each time you make an entry whether the transaction represents a debit or credit and where the appropriate debit or credit will appear. However, if you use bookkeeping software, such as QuickBooks, your checks, invoices and sales receipts will automatically appear in the correct credit and debit account, along with the appropriate debit or credit.

How to Use Accounting in Business:

The advantages of accounting are not just a matter of good business strategy, although accounting information definitely helps you strategize and plan. No business can survive without some sort of accounting system. If your company makes purchases and sales without keeping track of the amount you have bought and sold, you will have no way of determining whether you made a profit or incurred a loss at the end of the year. You won’t know how much you owe and how much you have, so you won’t be able to assess how much incoming money you can spend for personal use and how much you should keep in your company’s bank account for future business expenses. .

Accounting information also provides valuable insights into a company’s operations. This allows you to compare your sales in various categories over time, such as looking at trends for different products at a sales location. This gives you the tools and information to look at your expenses as a percentage of your income to see if your margins can be maintained and how your company’s performance compares to competitors in your industry. Pro cash flow pro forma will allow you to find a source of capital before you really need it and plan large purchases to fit the time of year when cash is plentiful. Running a business without accounting information is like flying a plane without radar.

Accounting is also required for the survival of your company as you are required to report income and pay taxes. Without a complete and accurate accounting system, you won’t know how much you earn and spend, and you won’t have the information you need to fill out local, state and federal tax forms. If your business needs financing, your loan application will require you to include financial statements from previous years and possible projections for future periods.

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