Bookkeeping and accounting are considered the backbone of a smooth business operation. However, many people get confused between the two terms as both have relation to financial reporting and used interchangeably, resulting in mismanagement of their businesses’ financials and accounts.
Businesses should not be confused between bookkeeping and accounting. While the two are related, interdependent business functions, they are distinct from one another.
Bookkeeping is responsible for recording source documents for all business operations and financial transactions, such as purchases, sales, receipts, payments, and other events. On the other hand, accounting is responsible for interpreting, classifying, analyzing, reporting, and summarizing the bookkeeping process’s financial data.
Proper record-keeping and accounting provide a wide array of advantages for companies, as a sound document management system can help their firms in different ways:
Monitor Company Growth Rate and Profit
Financial records, such as audit books, financial statements, and sales and purchase reports, reflect an organization’s financial position. Through these records, businesses can compare accounts of previous years with that of the current one to keep track of business results and analyze whether they are growing at a favorable rate or if they need to make some change to increase the likelihood of their success.
Enable Budgeting and Planning
Budgeting and planning are essential components of business management. It allows businesses to plan by anticipating the resources needed to accomplish the organization’s objectives.
Accounting reports assist businesses in a range of decision-making processes, including determining the price to be charged for products and services and the needed resources to make these. Additionally, accounting can also help business owners develop policies to increase their organizations’ competence.
Prepare Authentic Financial Statements
A sound record-keeping system ensures the availability of various business documents, such as income and expenditure statements and balance sheets. These records are helpful to prepare authentic and accurate financial reports, which can help companies manage their businesses.
Income and expenditure statements will show the overall profit and expenses of a business in a given period. Journals, balance sheets, general ledger, and other complex accounting records can be used as authentic proof of an organization’s legal assets, liabilities, and equities, during a specific date. These can also provide organizations a clearer picture of their financial position. Meanwhile, cash flow statements show the cash generated (cash inflows) and spent (outflows) during a specific period.
Proper Identification of Income Sources
Businesses receive monetary and property benefits from various income sources. Document records can identify the sources of an organization’s income. Furthermore, through the bookkeeping process, companies will be able to separate business from nonbusiness receipts; and taxable from nontaxable income.
Track Deductible Expenses
Tracking business expenses is essential in maintaining healthy cash flow, as it helps businesses control costs, see what they are spending their money on, and how much they are spending. Consequently, organizations keeping tabs on their expenses are often much better prepared for the tax season. Recording and categorizing expenditures can help firms separate their personal finances from their business expenses, those related directly to starting and maintaining the business.
Moreover, separating business expenses from personal expenses can significantly help organizations qualify for tax deductions and lower their overall tax rate, as business expenses can count as tax deductions.
Attain Complete Regulatory Compliances
Businesses have a legal obligation to maintain sufficient organizational records. The Internal Revenue Service (IRS) requires companies in the United States to have a record-keeping system that shows their income and expenses. Organizations based in the US also need to keep their business tax records for at least three from the time of tax filing. Meanwhile, the Canada Revenue Agency (CRA) demands businesses to keep documents, such as tax records and pay stubs, for a period of 6-7 years.
Accordingly, Her Majesty’s Revenue and Customs (HMRC), the ministerial department responsible for collecting taxes in the UK, also requires a business to keep accounting records for six years from the end of the last company financial year the documents relate to. On the other hand, companies based in the EU must follow the European Union’s record-keeping requirements for income tax, keeping all relevant records regarding their tax accounts for 5 to 10 years.
Ensuring the availability of authentic business records over time not only helps firms smoothly run their operations; instead, these also help establish compliance with laws and industry regulations. Accordingly, the accounting function will guarantee that liabilities, such as sales tax, VAT, and income tax, are appropriately addressed.
Support Items Reported on Tax Returns
Accounting records, which are generally used to prepare financial statements, are also mandatory requirements in preparing and filing tax returns. Hence, failure to keep good financial records could result in: underpayment or overpayment of taxes; penalties for late filing or underpayment; and additional tax preparation fees.
Avoid Interest and Penalties
Having effective financial document management makes it easier for businesses to pay the right amount of tax and by the time of the deadline as their requirements for tax returns are in good order and ready for filing, helping them avoid interest and penalties.
Record keeping and accounting help businesses keep track of their financial transactions and monitor their progress. Additionally, accounting records assist organizations in making informed, efficient, and precise decisions, which, in turn, help them become more competitive in their respective industries.
Manually writing journals or ledgers to keep proper business records may seem to be a daunting task, particularly for small business owners who do not have the luxury to figure out how to keep their own books and do their own accounting meticulously and cannot afford a certified accountant to complete the work for them.
Today’s database management and record-keeping solutions are making the bookkeeping and accounting processes a much simpler task. Many businesses use small business accounting software, which is relatively easy to use and generally affordable, to track their income and expenses.
Using Accounting as a Service (AaaS) makes the bookkeeping and accounting processes much more manageable for businesses. It can help firms generate balance sheets, categorize transactions, track sales, record disbursements, and monitor tax liabilities.
Companies also include digital mobile invoicing as part of their offered online accounting and bookkeeping services. Included in their invoicing features are automating the sending of invoices, which can allow businesses to view and receive invoices from anywhere and on any device efficiently.
Where to get an easy-to-use and time-saving bookkeeping and accounting services?
KIPPIN is a cloud-based mobile bookkeeping service tailored to simplify the accounting needs of businesses. We align our clients to top Bookkeepers and Accountants on our platform. We also provide a software-only solution, allowing our clients to manage their own books and automate the accounting process using our accounting platform.
Contact us today at 1-905-581-9362 or [email protected] You may also visit our website at kippinitsimple.com to learn more about our products and services.