Accounting Tips and Best Practices for Businesses in 2023
Sound accounting is one of the most important aspects of running a business. It is a critical pillar that helps a business startup on the right footing, establish itself in the market, and expand. It is an essential function for all size of businesses – small, medium, and large.
Role of accounting
The primary role of accounting is to maintain a systematic record of business transactions to ensure statutory and regulatory compliance and provide business owners/management teams with accurate insights on the financial health of the company/organization.
Accounting helps generate the following reports that are required not only by the management but also by investors, tax, and government departments:
- Profit and Loss Account or the Income and Expenditure Statement – This report/statement forms part of one of the most important statutory reports of an organization or business. It is its report of revenue/income, and expenses for a given period and reflects its profits or loss made over the said period.
- Balance Sheet – The balance sheet is the business’s next important statutory statement. It gives details of its assets and liabilities, thereby summarizing the business’s financial position.
- Cash / Funds Flow Statement – A vital statement, the cash flow statement provides an overview of the cash inflow and outflow for a particular period. It gives an understanding of a business’s financial strength at any point of time.
WHY is accounting so important?
It is the mirror to a business’s health, and is used not only by its internal stakeholders, but also by its external stakeholders. It:
- Ensures an accurate account of all business transactions
- Enables the computation of profit and loss on a real-time basis
- Helps determine the business’s financial position
- Arms business owners with reports and ratios that facilitate decision making
- Keeps businesses compliant with respect to the financial regulations
- Enables accurate calculation of taxes and duties payable
HOW to establish sound accounting practices
Fundamental to sound accounting is the establishment and enforcement of sound bookkeeping practices. Bookkeeping is the part of accounting that involves the accurate identification, measurement, recording, and classification of financial transactions. It entails the following best practices:
- Separate personal transactions from business transactions: This is the holy grail of running a compliant business – ensure no personal payments or receipts flow into the company’s records. This not only promotes accuracy and compliance but also builds credibility in the long run.
- Establish accounting principles and an accounting method: It is crucial to define the set of rules under which revenues and expenses will be reported in financial statements. Businesses can choose either the cash method of accounting or the accrual method. Under the cash basis, cash, expenses, and income are recorded as they take place; while under the accrual method, revenue and expenses are recorded as they happen, even if payment has not been made.
- Record transactions regularly: Your accounts team should record transactions in real-time or at regular intervals in order to ensure that every business transaction is accounted for.
- Maintain books of accounts: Journals, ledgers, and cashbooks are the primary books of account that every business is mandated to maintain for disclosure and taxation purposes. These books are also a scientific way to keep an account of all transactions.
- Document and file copies: Document and file contracts, agreements, and invoices against respective vendors, and transactions in order to establish a clear audit trail.
- Define internal controls: Internal control is the safeguarding mechanism of a business – they are prudent business practices blended in an organization’s normal operations. Once defined and enforced, they ensure business is run in accordance with accepted principles, errors and frauds are negated or minimized, and the business’s assets are protected.
- Track cash flows regularly: A cash flow statement is normally prepared for a specified period to provide a detailed picture of how much cash has flowed into and out of business during this period. It taps unnecessary payments, highlights collection/receipt delays, and projects how the business is positioned for the next period. Preparing regular cash statements helps to plug gaps on an almost real-time basis.
- Prepare Profit & Loss Statements and Balance Sheets periodically: This helps keep a pulse on the business’s progress and enables crucial decision making for course correction and growth.
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A good accounting software is key to keeping books of accounts clean and compliant at all times. It is the pedestal on which a successful business can be built. Additionally, as a company scales, management teams find it cumbersome, time-consuming and complicated to maintain accurate accounting records, even with the help of accounting software. Enlist accounting outsourcing services for a lean, efficient, effective, and compliant finance function.
Our team of experienced accounting professionals at Accounting To Taxes understands business requirements and industry needs. They have been providing efficient accounting outsourcing services to a wide range of clients globally.
Reach out to us for your accounting requirements at firstname.lastname@example.org or call +1 646 688 2821