The Importance of Good Bookkeeping
Bookkeeping Essentials 101 –
The Importance of Good Bookkeeping – A precise and expeditious bookkeeping system is one of the most important operating components of any small business. Accurate and current financial records make it possible for a business to assess its profitability and develop long range financial goals. They are an essential precursor to financial analysis, financial reporting and tax planning.
A good bookkeeping system includes some or all of the following accounts:
This account tracks the purchases of both raw materials and finished products that are used to carry out business functions. Purchases are subtracted from Sales to determine the Cost of Goods Sold.
This account tracks the revenue coming into the business from the sale of goods and/or services. Sales, together with Purchases, are used to calculate the Cost of Goods Sold.
This account is a record of the raw materials and finished products that a company has in stock. In addition to being used to calculate profitability, inventory numbers are essential to asset management, demand forecasting and price forecasting.
• Accounts Receivable
This account, which shows up as an asset on the company balance sheet, is a record of the outstanding amounts owed to a business by its customers for products or services sold.
• Accounts Payable
This account, which shows up as a liability on a company’s balance sheet, is an accounting of amounts owed by a business to its suppliers. It includes amounts owed for physical goods, services rendered and business expenses such as travel, advertising, utilities and office supplies.
• Loans Payable
This account keeps track of the outstanding loan balances, interest and redemptions, and terms of any loans taken by a business for the purpose of expanding or making capital purchases, among other things.
• Retained Earnings
This account keeps track of company profits that are reinvested in the company rather than being paid out to company owners. Retained earnings are shown as a cumulative total that began when the company was formed.
• Owners’ Equity
This account tracks the assets that each owner has invested in the company. It records both assets invested and assets withdrawn to yield a running total of each owner’s net equity.
The prompt and organized recording of day to day business functions in specific accounts such as those described above provides the information necessary to calculate a company’s book value, generate the reports required by lenders and investors and substantiate such tax related items as tax credits and tax deductions. In addition to these functions, an effective bookkeeping system provides business owners with the information they need to operate efficiently and maximize profits.
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