The two main reasons why it is vital for a business to keep accurate accounting records

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Jocelyn Hunt - AVCE Business Studies

Financial Accounting - Assignment One

Question One:

The two main reasons why it is vital for a business to keep accurate accounting records is 1. For legal reasons to do with acts enforced by parliament and 2. To record the performance of the business.

Every year companies are by law required to produce a set of accounting records that show a true and fair view of its financial position. Copies of these records then have to be filed with the Registrar of Companies at Companies' House and sent to every shareholder and debenture holder. The Companies Act 1985 states the minimum amount of information that has to be included, although many companies see it as a public relations opportunity and produce information on staff, products and other areas of the business. This is done in an attempt to make other parties such as shareholders aware of the company and of future developments. No matter the size of a business they must all comply with the legal requirements of the Companies' Act 1989.

From a practical point of view, if a company did not make any records of transactions carried out, it would prove to be impossible for them to evaluate the performance of the business or even compare it with another companies' performance. Good record keeping can show whether the business is improving, which items are selling and what changes are needed. By producing a profit and loss account and a balance sheet they can distinguish exactly where they have incurred expenses and what on e.g. Staff wages and electricity payments, and where money has been made e.g. profits from sales. The underlying need for these accounts to be kept is to establish whether a profit or loss has been made over the year.

The balance sheet simply shows the firm's assets e.g. premises or stock, and liabilities e.g. creditors, at a single point in time, showing a picture of the stock of wealth held by the business and the current financial position.
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Without these essential accounting documents problems can soon arise. The absence of a profit and loss account would mean the business were not keeping a sufficient eye on the outgoings and incomings of the firm, possibly causing them to slip into debt by spending more funds than they actually have available to them.

However, the main issue with not completing accurate records is concerned with value added tax (VAT) and corporation tax, which all companies have to pay. Corporation tax is the tax deducted from a companies profits and this is done before any dividends are ...

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