The Vitality of Keeping Accurate Accounting Records for a Business
The two main reasons why it is vital for a business to keep accurate
accounting records is 1. For legal reasons to do with acts enforced by
parliament and 2. To record the performance of the business.
Every year companies are by law required to produce a set of
accounting records that show a true and fair view of its financial
position. Copies of these records then have to be filed with the
Registrar of Companies at Companies' House and sent to every
shareholder and debenture holder. The Companies Act 1985 states the
minimum amount of information that has to be included, although many
companies see it as a public relations opportunity and produce
information on staff, products and other areas of the business. This
is done in an attempt to make other parties such as shareholders aware
of the company and of future developments. No matter the size of a
business they must all comply with the legal requirements of the
Companies' Act 1989.
From a practical point of view, if a company did not make any records
of transactions carried out, it would prove to be impossible for them
to evaluate the performance of the business or even compare it with
another companies' performance. Good record keeping can show whether
the business is improving, which items are selling and what changes
are needed. By producing a profit and loss account and a balance sheet
they can distinguish exactly where they have incurred expenses and
what on e.g. Staff wages and electricity payments, and where money has
been made e.g. profits from sales. The underlying need for these
accounts to be kept is to establish whether a profit or loss has been
made over the year.
The balance sheet simply shows the firm's assets e.g. premises or
stock, and liabilities e.g. creditors, at a single point in time,
showing a picture of the stock of wealth held by the business and the
current financial position.
Without these essential accounting documents problems can soon arise.
The absence of a profit and loss account would mean the business were
not keeping a sufficient eye on the outgoings and incomings of the
firm, possibly causing them to slip into debt by spending more funds
than they actually have available to them.
However, the main issue with not completing accurate records is
concerned with value added tax (VAT) and corporation tax, which all
companies have to pay. Corporation tax is the tax deducted from a
companies profits and this is done before any dividends are paid to
shareholders. By not having the appropriate and accurate information
available, a company would have no sure way of telling if they were
paying too much tax in relation to profits made or if they were not
enough tax, which would be seen as...