There is no way for you to know the health of your business without accounting. So let’s dig more into its necessity.
Believe us when we say that there are no booming businesses without successful accounting practices. Think about it. How will you make the right decisions if you have zero idea of how your business is doing? Exactly, you won’t. You will make terrible decisions that will either slowly and painfully or quickly and nonetheless painfully send your business to hell. And there is no way for you to know the health of your business without accounting. So let’s dig more into its necessity.
The profession of an accountant has been around for centuries and is still used globally these days. But times change and so does the world we live in. In today’s day and age, you’re able to simplify your work and save time by using digital tools like Kernel. Never the less the importance of accounting has not diminished one bit. In fact, one can argue that it grew exponentially.
Itis a somewhat complicated system of collecting and communicating financial data to business owners, employees, the public, or even the government. Only by analyzing the firm’s income, costs, taxes, etc, can we determine whether or not our business is profitable.
A business manager uses it to develop goals and plans, set budgets, and evaluate future prospects. Employees and unions use it to plan for and receive compensation and such benefits like health care, vacation time, and retirement pay. Investors and creditors use it to estimate returns to stockholders, determine growth prospects, and assess whether a firm is a good credit risk.
You can use accounting for numerous ends in countless settings, but for simplicity, we can split it into two financial and managerial fields.
Financial accounting prepares reports such as income statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions. But, for example, if you’re going to make a new product or improve operations, you’ll need managerial accounting.
The main difference between financial and managerial accounting is that financial accounting is the process of collecting accounting data and then using it to generate financial statements, while managerial accounting is the internal accounting process used to account for business transactions. For our purposes though, we can say that these two fields have one extremely important thing in common. They both work with financial statements, although in a different manner. There are three statements you absolutely have to keep track of:
- A balance sheet is a statement of a business’s financial position that lists the assets, liabilities, and owners’ equity at a particular point in time. In other words, the balance sheet illustrates a business’s net worth. Why do you need to care about this statement? You do want to keep track of what you own and what you owe, don’t you? Also,
- Everything associated with revenues and expenses can be found in this statement. This is why when someone wants to know whether a company was profitable during this or that period usually asks for this document.
- A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. This statement is useful because, under the notion that cash is king, it allows you to get an overall sense of the company’s cash inflows and outflows and obtain a general understanding of its overall performance.
Without it, you wouldn’t know how much money your business earns. And you could easily forget how much money you paid out. Plus, you wouldn’t remember how your current profit or loss compared to the previous quarters’. God!
Additionally, accounting is necessary to file for tax returns, apply for a loan to expand your business, or for specific legal purposes.
And who is going to protect you when revenue services come for an audit? That’s right.
We understand, no living soul ever dreams of spending their days making numerous calculations and constructing financial statements. But in this century, this no longer is a viable excuse because there are tools like Kernel, Xero, Waveapps, etc, that will do your job in minutes. So, whatever you do, do not neglect your books!