Accounting is the systematic process of recording, analyzing and interpreting the financial transactions. By law, all businesses are required to submit their accounts to the Income Tax (IT) Department. Several start-ups tend to ignore this requirement early on and then scramble to put together their accounts when they are raising funding or being acquired. Maintaining the books in-house certainly is a tedious and possibly expensive affair, but getting it done would significantly reduce pains in complying with the requirements of the IT Department; it gives the promoters and shareholders a good sense of how the business is doing and proves eligibility for loans in later years, and even satisfies investors.
An effective accounting system in place helps startups and established companies in:
Budgeting helps organizations in effectively controlling the income and expenditure of the company while monitoring the managerial policies and goals of the business. It provides a disciplined approach to developing strategies; directing capital and other resources into profitable channels.
Managing Cash Flow:
Regular tracking of the money that comes into the business helps in predicting the trends, paying to staff and suppliers, covering debts, etc.
Presenting Information to Investors and Stakeholders:
While approaching potential investors, creditors, banks or borrowers, the financial statements and other reports serve as financial scorecards of the company. Investors will get a better sense of the financial health of the business which includes the net worth, debts, savings, amount spent on fixed expenses. In addition, they will get to know the solvency, creditworthiness, liquidity, stocks and bond issuers of the business.
Evaluating The Performance of The Business:
Accounting system acts as a yardstick in measuring the performance of the business with respect to key metrics like net profit, sales growth.
Mandatory By Law:
In India, as the Registrar of Companies demands a strict record of income tax payments at the end of the year, without maintaining accounts companies may end up paying tax in excess.
Proper maintenance of books and accounts is a prerequisite to any business entity. Further, it is mandatory for firms undergoing statutory or internal audit.
This plan is designed to address the accounting needs of businesses and professionals operating as :
► Goods Traders
► Professionals & Consultants
► Share Market Traders
► Individual Freelancers
► Income tax act requires compulsory audit in certain cases and that is possible only when books have been maintained as per the law.
► Companies are regulated by the Companies Act and as per the Act every company is required to file annual return with registrar of companies. It is mandatory even if there are losses or no income in a financial year.
► Helps individuals and businesses keep a track of their expenses, monitor their revenues and take informed financial decisions.
An accountant understands the fundamentals of accounting. The proper classification of expenses as capital in nature (e.g. Fixed assets) or revenue in nature (e.g. purchases) is important. Incorrect accounting can lead to financial losses. Though various accounting tools have come up over the time but the human intelligence is irreplaceable.