Bookkeeping and Accounting – how important is it for your business?
Though Bookkeeping and Accounting seem to be synonyms for a single operation, they are actually two interrelated different tasks essentially to be performed in a business entity. Whilst Bookkeeping is primarily aiming to record the business transactions in the Books of Accounts, Accounting on the other hand is to analyze the recorded data and derive the financial information aiding the decision-making.
Bookkeeping is the basis for accounting as it involves proper and systematic recording of every transaction. It involves identifying and recording financial transactions, preparation of ledger accounts, balancing of accounts and preparation of trial balance. The Bookkeeper must follow the basic accounting concepts and conventions, and keep track of the important financial transactions like:
- Cash ledger to record the cash receipts and payments
- Accounts Receivable
- Accounts payable
- Sales etc. to list a few.
Cash flow management plays a vital role for the existence and growth of an any business entity. Delayed invoices, improper inventory, poor follow-up on customer payments, losing customers are some of the crucial flaws that will ruin the business. A proper Bookkeeping system enables to systemize these transactions with periodical updates so that those flaws can be eliminated.
Bookkeeping is also essential in accomplishing the annual taxes by keeping track on the financial transactions. Bookkeeping paves way for preparing the Balance sheet, Profit & Loss account there by making Tax returns simple. It also helps to assess the current financial position for good decision-making.
The postings in the Books of Accounts tells the financial status through data, chart, graph thereby making reporting of crucial information easy. Most of all, it is required by law to maintain a set of books that support the revenue and expenses while filing tax returns.
Accounting involves data collection, data evaluation and reporting of financial transactions. It also enables recording, classifying, summarizing financial transactions appropriately making it a broader concept than bookkeeping. The main objective is to maintain proper records of business, calculation of profit or loss, providing effective control mechanism over business operations, and depicting financial position.
Proper accounting helps to know the financial status of an entity paving the way for a systematic analysis of the previous income and expenditure records, profit or loss, taxes paid, assets & liabilities, and so on. It also helps predict the earning capacity of the entity, which in turn affects crucial decision-making in the entity.
Accounting ensures proper Bookkeeping, which is critical for budget planning. It provides a control mechanism to contain the expenditure when it exceeds the budget. Proper accounting helps predict the business trend and projections based on the historical data. Hence, it is a must to ascertain profit, which is the basic objective of any business. It also ensures statutory compliance and addresses the liabilities such as sales and income tax.
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