Accounting is a process and a tool that provides important feedback about a company's financial health. Accounting systems also help to meet basic legal requirements detailing and documenting earnings and net revenue. Although many business owners see accounting as a distasteful chore, a commitment to keeping accurate and current records can help you to understand what your company needs to break even and earn a profit. Accounting can also help you to detect embezzlement, keep you out of legal trouble, and enable you to prepare financial statements to secure necessary funding.
Every business is based on expenditures and income: You must pay for the materials, infrastructure and labor to create your products and services, which you in turn exchange for revenue. Accounting involves keeping track of the money you spend and the money you earn, and observing the relationship between the two. Whether you keep track of income and expenses by using a sophisticated bookkeeping program or by storing receipts in a shoebox and then periodically organizing and entering them, you are essentially pursuing the same objective: tracking and observing your company's financial behavior.
Your business is legally required to pay taxes to a variety of government institutions, from state and local revenue departments, to the Internal Revenue Service. Some of these taxes are based on the gross amount of the receipts that your company collects, while others are based on the net amount your have left over after paying for business expenses. You are also required to withhold taxes from employee paychecks and remit these sums periodically to the appropriate agencies, along with your employer's share of payroll taxes. Accounting systems keep track of the financial activity that you must report on your tax forms.
In order to stay solvent and earn a profit, every business must take in more than it spends, at least over the long term. By organizing and compiling records explaining your company's financial activity, an accounting system will provide you with valuable feedback telling you whether your business is earning enough to make ends meet and, if not, where you are spending too much money. By paying close attention to this valuable information, you will be able to tinker with systems in order to improve your company's financial health.
Accounting also involves the process of synthesizing many small pieces of information into comprehensive financial statements that show the big picture. Financial statements include balance sheets, which depict your overall assets; profit and loss statements, which show how much your company earns during a specific period; and cash flow projections, which calculate how much liquid cash you expect to have available. Financial statements are useful when applying for loans or selling a business. They also help to summarize information for internal evaluation as well as for tax reporting.
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