How Does Accounting Help a Business?
Accounting is an essential part of running a business. Accounting allows you to keep track of what money is going in or out of your business. It separates out your expenses, enables your taxes to be computed and is a mechanism for convincing banks or investors to give you loans or capital.
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Keeping Track of Your Money
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The most basic use of accounting in business is that it keeps track of what money is in a given business and where it is. In order to run your business strategically, you must be aware of how much money you have, what you owe and are owed, what you spend money on and how much money is coming into the business.
Taxes
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All businesses, just like individuals, must pay taxes. At the most basic level, a business owner must know the business's yearly expenses and profits in order to file taxes. If a business has employees, an owner must report wages and pay social security taxes, the amounts of which are recorded throughout the year in the business's accounting system. Thorough accounting also allows businesses to take advantage of tax credits and deductibles. Furthermore, if the IRS audits a business, the business must have a detailed and accurate accounting system in place in order for the IRS agent to check accounts and for the business to pass the audit.
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Loans and Investors
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If your business needs a loan or wants to attract investors, the business will have to produce financial statements generated by an accountant that attest to the financial health, profitability and effective management of the business. The only way to produce such statements, let alone convincing ones, is to have a good accounting system in place.
Cash Flow
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Cash flow---the amount of money going into and out of a business---is important in making any business or financial decision. Cash flow is one of the many things recorded in accounting. If you are unaware of your business's cash flow, it is extremely easy to bankrupt the business.
Balance Sheet
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The balance sheet is perhaps the most important part of business accounting, as it shows a business's assets and liabilities at any given time. Balance sheets are used to assess if a business is making any money. If your accounting is shoddy or nonexistent, you will be unable to assess if your business is fulfilling its most basic purpose.
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References
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