Accountancy and business walk hand in hand. We cannot have one without the other. In order to evaluate the financial performance of the business, accounting makes it easier for the investors, owners, and other shareholders. Accounting is important in business due to the following reasons –
1. Keeps organized – Without accounting, we would not be aware of how much money the business has earned, how much money has been paid out, the current profits or loss.
Accounting helps us to know all of these and also keeps us organized so we can accurately and legally fill out our taxes. It also helps in avoiding losses caused by theft, fraud, errors, damage, obsolescence, and mismanagement.
2. Backs up our tax return claim – accounting helps to gather financial records. Without these records, we would not be able to enter the correct number on our return. Accounting would be useful in business if we get audited, so we show them our due diligence and have the necessary accounting info to back up our return.
3. Holds accountable – accounting helps us to show our shareholders about the growth and success of the business by looking at the accounting records. It can also help us to hold our employees accountable.
4. Decision-making – accounting helps us to avoid common business mistakes such as overspending, etc. While thinking of buying something new for the business we have to take into consideration whether we will be able to afford it or not. Accounting records help us to consider all of these based on the data and help owners in developing policies to increase the efficiency of business processes. It also damages the risk of bankruptcy through the detection of bottlenecks.
5. Measuring new strategies with hard numbers – if we want to make a change in our business we check our risk analysis, that is, whether this change will benefit the business or will cause loss. So, accounting helps us to compare the revenue before and after the change, whether the strategy helped or damaged the business.
6. Investment and loan – before the investor or lenders, invest or lend money, they need to check the business accounting books. Accounting helps to sort all the financial statements, financial forecasts, and profitability claims and in this way they can obtain information about your profitability.
7. Performance – accounting helps business owners to compare themselves against their past performance as well as against the competitors. The business owners can determine how well their business is performing by using the accounting records.
We can choose how we want to handle accounting in our business but it is a must to have an accounting system. Without an accounting system, our small business tax return will be inaccurate and we may also get red flags and penalties from the IRS.