The Importance of Keeping Accurate Accounts.
The Importance of Keeping Accurate Accounts
It is important for a business to create and maintain accurate financial records and to know about the different users of financial information. Every business has to meet internal and external reporting requirements to show its financial health and to meet legal and other requirements. The reasons why businesses therefore keep accurate records are:
* Assessing its financial position - businesses assess their financial position every year so they know the business is making efficient use of resources to provide the necessary financial return to achieve a profit or suffered a loss. Businesses can find out if it as the ability to generate cash to ensure continued trading and to make dividend payments. This can be done by using figures from the profit/loss account and balance sheet to work out appropriate ratio such as acid test ratio which shows the liquidity of the business.
* Compare its performance with previous years - this can show businesses its future prospects and predict future trends to show profit and loss. Good records provide the financial data that help you operate more efficiently, thus increasing the profitability of your enterprise. This is because accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses which, when compared to appropriate industry averages, help you pinpoint the strong and weak phases of your business operations over the years. Records can be compared by working out gross profit and net profit margins for pervious years which will show if the business as increased or decreased their profits over the years. This will also show if the business as understated or overstated their profits over the years.
* Raise finance - can support businesses wanting to raise money by comparing the accounts and to pay of expenses. Need to raise finance to show bank manager for a successful bank loan. Good records are essential for the preparation of current financial statements, such as the Income Statement (Profit and Loss) and the Cash Flow Projection. These, in turn, are critical for maintaining good relations with your banker. They also will present a complete picture of your total business operation which will benefit you as well.
* Comply with statutory requirements - the Accounting Standards ...
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* Raise finance - can support businesses wanting to raise money by comparing the accounts and to pay of expenses. Need to raise finance to show bank manager for a successful bank loan. Good records are essential for the preparation of current financial statements, such as the Income Statement (Profit and Loss) and the Cash Flow Projection. These, in turn, are critical for maintaining good relations with your banker. They also will present a complete picture of your total business operation which will benefit you as well.
* Comply with statutory requirements - the Accounting Standards Board issues accounting standards. The Statement of Standard Accounting Practice (SSAP) was introduced with the aim of limiting the ability of accountants to use diverse accounting procedures, therefore businesses must comply with legal requirements. Good records are required for the preparation of complete and accurate tax documents. For example, poor records often lead to the preparation of income tax returns that result in underpayment or overpayment of taxes. In addition, good records are essential in an IRS audit situation, if you hope to answer questions accurately and to the satisfaction of the IRS.
* Make decisions - this will provide information that will help managers make decisions about the future trends of the business. Any record keeping system should be accurate, reliable, easy to follow, consistent as to the basis used and be very simple. Good record keeping is vital in regards to meeting the financial commitments of the business and providing information on which decisions for the future of the business can be based. While the business maintains records to monitor and record its normal business activities, it is also necessary because of obligations under the taxation laws.
* Keep stakeholders informed - can improve investor's confidence and can make more contributions by investing in more money into the business if they are regularly informed about the success of the business. Paying high dividends to shareholders and informing them on future dividends can make shareholders invest more money.
Internal and external stakeholders interested in the business
The following stakeholders are internally involved in the business:
Owners/shareholders - interested in whether the business is making a profit - to receive dividends, state of financial affairs, financial structure, future prospects.
Managers - involved and interested with the performance of the business, also concerned about the financial structure and information relating to their to make decisions.
Employees - concerned about with their job security and how the business is going to develop to ascertain themselves for promotion needs, also financial structure to support wage claims.
The following stakeholders are externally involved outside the business:
Brokers - require the same sort of interest as owners, but brokers advise clients about the nature of their investments. Need to know company performance in order to advise clients accurately.
Lenders - interested in whether the business as the ability to pay interest and make repayments on the loans. Therefore interested in the cash flow statement, assets and ability to pay debts.
Customers - interested to know suppliers are secure for the future so customers will want to develop long term trading. Therefore also interested I the size of the business, profits and financial information.
Community - can be interested in the business providing jobs for the community and contributing to community projects. Community also interested whether business activity is affecting the communities environment.
Competitors - will be interested in the financial information which can be freely obtained if PLC so the competitors can stay one-step ahead. Other information maybe published in the press, looking at activities of competitors to think ahead.
Suppliers - concerned about the businesses ability to pay for materials or services. If pay off materials quickly suppliers can be committed for long term trading for the business.
Fundamental accounting concepts
These comprise a set of concepts considered so important that they have been enforced through the companies Act 1985.
They are:
* Going Concern
The concept of going concern is that an entity should prepare its financial statements on a going concern basis unless the entity is being liquidated or has ceased trading.
* Accruals
This is the concept of matching.
Revenue and expenses are accrued, i.e. recognised in the accounts, when earned or incurred rather than when money is received or paid, and dealt with in the profit and loss account in the period to which they relate.
* Consistency
The concept requires consistency of the treatment of like items from one year to the next, with accounting policies being applied consistently within each accounting period.
A change of a consistently applied accounting policy is permitted only if the new one is preferable to the one that it is replacing and results in a fairer presentation of the financial information.
Although 'consistency', as described above, is still referred to in CA85, accounting standards no longer give it the same weight as 'going concern' or 'accruals'. In particular it is formally acknowledged that 'consistency' must not be allowed to prevent improvements in accounting.
* Prudence
The concept of prudence is that revenue and profits are not anticipated, but are recognised in the profit and loss account only when realised in the form of cash or other assets the ultimate cash realisation of which can be assessed with reasonable certainty.
Provision is made for all known liabilities whether the amount of these is known with certainty or is a best estimate in the light of the information available.
Similarly, 'prudence', which is defined in CA85 in the terms set out above, is no longer held in the same esteem by accounting standards. The up to date view of 'prudence' is that it is a concept applied to situations of uncertainty. Where there is doubt it is prudent to require firmer evidence about the existence of a gain or asset than about the existence of a liability or loss, and it is prudent to require a greater reliability of measurement for assets and gains than for losses.
* The business entity concept
The transactions recorded in a firm's books are the transactions that affect the firm. The only attempt to show how the transactions affect the owners of a business is limited to showing how their capital in the firm is affected.
* The dual aspect concept
This states that there are two aspects of accounting, one represented by the assets of the business and other by the claims against them. The concept states that these two aspects are always equal to each other. In other words:
Assets = Liabilities + Capital
