What are the importance of book keeping in accountacy?
Answers
Answer:
Bookkeeping is the process of keeping completed records of financial transactions and updating them periodically from time to time. Bookkeeping keeps records of aspects such as how much money your business owes and shall receive, what is the investment amount and the profit derived from it and such similar aspects.
Importance of Bookkeeping
Bookkeeping is beneficial to business owners. It helps the businesses to effectively manage cash flows, planning for future and being well informed about running of business. Further, it does comply with federal and local tax agencies requirements. The importance of bookkeeping can be explained with the help of following points:
Ease in Making Routine Business Decisions: How would you decide what amount you owe to your supplier if you have no bookkeeping? It will be very tough task. However, if the bookkeeping is done properly, you can easily get all the accounting records at instance. Hence, bookkeeping helps in making routine business decisions easier and smoother.
Making Business Evaluations: How can you determine whether your business is growing or not? This can exactly be known by keeping financial records through a bookkeeping mechanism. Bookkeeping helps to formulate Trial Balance and Balance Sheets. Performance evaluations of businesses can be made on quarterly basis by making effective comparison between aspects of profit and growth. This helps to give you a fair outlook on the growth prospects of the business.
Proper Reporting to Investors: Investors own a stake in business and have the capability to make effective decisions. They are most concerned about whether their money has been utilized properly or not. They would certainly want to know whether the business is making money or not. They would also like to know the potential of businesses. These aspects are easily handled by bookkeeping. Profit and Loss account made periodically reports the profits and also determines the potential on the basis of revenues. The performance charts and various information can be easily prepared and documented. Hence, bookkeeping helps to avoid the hassles involved in reporting results to investors.
Managing Cash Flows: Tracking cash flows is an important task of any business. It is possible only when the businesses follow the adequate steps to record the financial data effectively through bookkeeping. Bookkeeping helps to make the cash flow management useful as it depicts the sources from where the cash flows are coming and use where cash is spent. Many businesses get hit by unexpected cash crunch. This can be resolved through bookkeeping only.
Effective Tax Compliance: Tax reports are prepared to effectively assess the tax payable to the federal and local authorities. Tax reports can only be prepared with the help of recorded financial transactions. Effective bookkeeping will keep the tax affairs at ease and businesses can easily calculate the exact amount of taxes to be paid. The information which has to be filed in tax reports has to be accurate and presented in professional manner. Failure to keeping tax affairs updated may lead to serious repercussions and huge fines and litigations. Hence, to avoid such fines and litigations, bookkeeping plays a pivotal role to provide the required date in a well-presented manner and on a timely basis.
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