The Importance of Accounting For Small Businesses
Many small business owners think that accounting is only for big businesses. Nothing could be further from the truth.
Governments around the world require businesses of all shapes and sizes to maintain an accurate financial record of their transactions and share it with all the stakeholders, tax authorities and regulators. A good accounting system provides business critical information that managers need for decision-making.
Here are some other reasons why accounting is important.
It Keeps Your Business Organized
An effective accounting system accurately records and preserves financial information for future reference. It keeps this information organized. If a company’s financial records are not maintained properly, stakeholders have no way of knowing how much money the business is earning. Lack of accurate, reliable information can cripple decision-making.
Without an accounting system, you will have difficulty keeping track of your cash flow. You can forget what you have paid and what you are owed. As a result, you may not have an accurate record of your business’s profit or loss.
It Paves the Way For Better Decision-Making
Financial statements such as cash flow statements, balance sheets and income statements are a goldmine of financial information. They provide business critical insights that top management can use to make important investment, diversification and expansion decisions. Top management can also use financial information to build a long-term business strategy.
Business accounting is the process of recording, processing and sharing financial information pertaining to a business.
The Accounting Cycle
There are usually eight steps in the accounting cycle
- Identify Transactions: Invoices, receipts and bank or credit statements are collected. The accountant studies all transactions and records them accurately in the company’s books
- Record Transition in a journal: The second step is the creation of journal entries for every transaction. There are two recording methods – single entry and double entry. Today most businesses use double-entry accounting, which records each transaction in two accounts
- Posting: After every transaction is recorded as a journal entry, it should be posted to the appropriate account in the ledger
- Prepare an Un-adjusted Trial Balance: At the end of a reporting/accounting period, a trial balance that tells the company its balance in each account is prepared
- Create a Worksheet and Make Adjusting Entries: A worksheet is created to ensure that the debits and credits match and adjusting entries are made. An adjusting entry records any unrecognized income or expense
- Prepare an Adjusted Trial Balance: After all, adjusting entries are made, you have an adjusted trial balance
- Prepare Financial Statements: Using the information collected in the above steps, your accountant creates your company’s financial statements including a balance sheet, income statement and cash flow statement
- Close the Books: The accountant closes the books at the end of the day on the specified closing date
Helps You Secure Investments and Loans
Before investing in your business, an investor will want to take a look at your financial statements. Businesses that do not maintain their books of accounts have no way to back their claims regarding their revenue and profitability.
If you want to obtain a small business loan, you will need to provide your financial statements for the past three years and a projected cash flow statement. It’s almost impossible to prepare these statements without an accounting system in place.
It Ensures Statutory Compliance
Federal and state governments require businesses to maintain their books of accounts in the prescribed manner. Your books should be accessible, organized and accurate at all times.
A regulating body can review your financial records at any time. If you fail to maintain your financial statements properly, you can find yourself in a legal soup. A robust accounting system and accounting processes help ensure financial statements are prepared accurately and in accordance with the rules.