The Purpose of Keeping Accurate Accounts

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The Purpose 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, they do this through analysing the cash flow, profit and loss account, and balance sheet. 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 the company's performance with previous years - this can show businesses their 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 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.

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 are interested in whether the business is making a profit - to receive dividends, state of financial affairs, financial structure, and future prospects and to know how good a job management is doing. 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 in 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.

Accounts for social clubs

Few clubs and societies records are kept in double entry. The cash book is the minimal accounting record a business can have, the equivalent to this is a receipts and payments accounts, which are made yearly. There are two complications with the receipts and payments book that societies and clubs do not take into account; this is that it does not account for accruals or pre-payments, and there is no distinction between capital and revenue expenditure, so that they cannot claim for depreciation.

The income and expenditure account allows for three things, prepayments, accruals, and depreciation for fixed assets are allowed.

Social clubs have other forms of revenue such as the bar: raffles: restaurants: membership fees: shops for goods: and fund-raising activities. These things are done to burst membership. The areas which cause concern or complications within Social clubs, are overdue subscriptions: long life membership: entrance and joining fees: donations: and depreciation.

Comparison and contrast between the preparation between Limited companies and partnerships.

The format of accounting is almost the same as that set out by the Sole Trader, although there are a few differences; the initial capital is going into the business by means of a capital account for each member of the partnership. Each partner also has a current account and a drawings account. The net profit is appropriated or shared out according to previous agreed ratios. Partners may be charged interest on their drawings and may receive interest on capital. On admission or retirement of a partner there may need to be a new situation to be arranged.

There are two types of Limited companies, Private Limited Company, and Public Limited Company. Shares of a Public Limited company are available to the public; Limited companies are not available to the public only family friends and members.

Limited companies must keep to accounting records by law, by statuary requirements they must have a Trading Profit and Loss account, Balance sheet, Annual report, and an External Auditors report. Limited companies have share capital; authorised share capital is what the company decides originally how many shares they have.

Dividends are appropriations of profit; debenture holders take priority when there is a payout of dividends. There is an order of preference debenture holders come first, and then preference share holders, and ordinary share holders. Revenue reserves are available to share out as a dividend capital reserves are not.

There are many complex rules and regulations there is an option to buy pre-prepared companies, from Companies House in Cardiff. Within a limited company there must be a minimum of two directors, one a managing director, and the other is a legal secretary.
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A limited company has unlimited liability, a partnership does not. This means that a limited company can only lose what belongs to the company, and not personal assets, whereas a partnership personal assets may be ceased.

Comparison and contrast between the preparation of accounts for a sole trader with a non profit organisation.

The sole trader only requires minimal statements which is the bank statement and the cash book. The cash book is full accounts to perform final accounts. Their business aim is to make a profit.

A non-profit organisation minimal statement ...

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