Northwood Accountancy | What Is Bookkeeping And Why Every Company Needs It
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What Is Bookkeeping And Why Every Company Needs It

What Is Bookkeeping And Why Every Company Needs It

When it comes to running a healthy and successful organization, it is important to have detailed records of all of the related financial transactions. If you have ever asked the question, “What is bookkeeping?”, then the information that follows is definitely for you. Read on to find out why this practice is essential for businesses of every size.

No company can function without financing. The old adage is certainly true: it takes some measure of money in order for companies or consumers to make money. As such, most business owners have to establish their enterprises by seeking funding from outside sources. They might round up a few qualified investors, or they may seek their funding from a local bank.

Regardless of how a business is financed, it must be able to show its backers how its money is being spent. With bookkeeping, all income and expenses are diligently tracked. Moreover, all of the related banking accounts are reconciled so that no funds are unaccounted for. This allows company owners to show their stakeholders exactly how they are performing and just how the borrowed funds are being used.

However, bookkeeping isn’t just important for keeping stakeholders up to date. It is also a vital part of making sure that a business endeavor is actually a profitable one. Companies have to know how much money they are spending in order to keep themselves afloat in order to determine how much they are actually clearing in profits. Without diligent record keeping, it would be virtually impossible for companies to stay abreast of their overall financial circumstances.

Another important part of these efforts is making sure that outgoing invoices are being collected upon and that incoming invoices are being paid. These two activities are known as accounts receivable and accounts payable respectively. If you have a large and growing company, your accounting will be split into multiple areas and handled by a number of highly trained professionals. For small-sized companies, however, having a single bookkeeper is often sufficient.

It may be that you have multiple employees on your staff as well. If this is the case, then payroll has to be factored into these duties. Once payroll becomes an issue that businesses must contend with, bringing on sufficient in-house help or outsourcing all of these efforts to a qualified third-party becomes essential.

Bookkeeping is also vital for taxation purposes. In fact, this is the most important reason for diligently tracking the spending and income of a commercial operation. At the end of the year, companies can use these records to assess their own tax liability. Once they have filed their taxes, these same records can be used to justify the amount that they have claimed in terms of assessed value, overall earnings and overall tax debt.

At the end of the day, there are a number of important legal reasons why companies must keep regular, diligent and accurate financial records. Maintaining high levels of transparency in this area is a sign of trustworthiness. It also makes it possible for company owners to provide sufficient financial information to the public, should they ever choose to trade their stock publicly.