Accounting is the practice of maintaining the details of the financial transactions of a business. It has a vital role in conducting business as it produces a clear picture of the income and expenditures of business to the management and helps them to take correct business decisions. It also ensures that all rules and regulations are complied with by the organization.
It also provides information necessary for the satisfaction of the investors and the government. Accounting generates financial statements like income statements depicting the profit and loss, balance sheets revealing the financial health of the business, and so forth.
Accountancy statements are of vital importance for tax compliance measures of a business. A company usually takes assistance for proper tax compliance from professional accountants and tax consultants like Manchester Tax Consultants who help them to manage their tax profiles and maintain their accounts and pay their taxes correctly and on time.
8 Reasons Why Accounting Plays A Crucial Role In Running A Business
1. Tax Compliance
Tax Compliance requirements are one of the obvious necessities of why accounting practices are crucial to the running of businesses in any country. Every country has tax laws, and companies that make a profit have to pay taxes as per their turnover. Companies also get various tax rebates based on the income bracket they fall into.
A balance sheet is a document that is necessary if an organization does not want to default on taxes and thus avoid the glares of the tax authorities.
2. Ensures Transparency
Maintaining a balance sheet helps ensure transparency for the employers, employees as well as shareholders of a company. Hence balance sheets help make prudent business and investment decisions for a company.
Not only the employees and the management but banks, creditors, and debtors of the company can keep an eye on the workings of a company based on its balance sheet.
3. Detecting Financial Fraud
An accounting exercise helps detect the financial fraud of a company. Since it tabulates all the entries of purchases made, payments given and receipts obtained by the company, it automatically helps detect leaks and frauds in the system.
Detecting leaks go a long way in improving the status of the financial health of a company and puts precious financial resources into productive use.
4. Planning The Long Term Plans Of The Business
Every organization undertakes a budget preparation, an accountancy-supported exercise. The budget analyses the current resources and makes policies to allocate those resources in accordance with the long-term planning of the company.
The accounts statement serves as a blueprint for the budget preparation exercise of a company. The accounting statements make the decision-making, a data-driven process, that makes sure that sound business management goals are followed by the company in the long term.
5. Helps A Company In Raising Capital
All businesses need to raise capital, in order to, expand the operations of their company. Businesses primarily raise capital in two ways- through the banking network or through the minority shareholders, who are members of the common public.
When banks give loans to companies they do so based on the company’s ability to repay the loan. This ability to repay loans is known as the solvency margin. It is the balance sheet of a company that helps decide the solvency margin of a company. Thus the more solvent or financially healthy a company is, the easier it is for the company to get a loan sanctioned.
Like banks, minority shareholders also make decisions about where to park their hard-earned savings based on the financial health of the company. When a company decides to float a share, whether the shares will get subscribed to or not depends to a great extent on the health of the company’s balance sheet.
6. A Metric To Assess The Efficiency Of The Business
Since a balance sheet accounts for the profit and loss that a company suffers, it provides a metric of the company’s health. For instance, balance sheets reflect a term known as incremental capital to output ratio (ICOR). The lower the ICOR the healthier the company. ICOR shows the amount of extra output generated per unit of capital employed.
Like the ICOR, the accountancy practice gives out several such indices to judge the performance of a business.
7. Determining The Price Of A Company’s Share
When a company releases its shares for the general public to subscribe to, the company’s financial health represented by its accounts determines the price of its shares.
If a company is in sound financial health it finds it easier to sell out its shares. Also, the interest to be offered for such shares is much less as the company is in good health and the chances of default/risk are minimum.
8. Representing Tax litigations And Appeals
At times, despite following all compliance measures and paying taxes regularly a company might have to face the tax authorities. In that case, if a tax irregularity has happened due to bonafide mistakes, the dispute can be redressed based on the balance sheets of the company.
In the case of income tax litigations, lawyers almost always take the help of the company’s balance sheets to face government officials.
Thus, accountancy is one of the core tools in the hands of a business to plan, expand and achieve its long-term goals. Companies, big and small, for this precise reason, hire accountants and tax consultants who work meticulously, day and night, and follow sound accounting principles.
Companies everywhere in the world spend millions of pounds on hiring top accountants, tax consultants, and auditors to leverage the immense benefits of following correct accounting practices.
Businesses with proper accounting can easily comprehend their financial health and rationalize their finances accordingly. They can create loyalty toward them from minority shareholders.
It would not be an overstatement to say that prudent accounting maintains good economics for companies which in the long term helps in the good economic progress of a country as a whole.