Accounting and auditing are two essential elements of the financial record management of a business. Imagine keeping track of all your financial activities without an efficient accounting process? You won’t have a structured record of your income and expenses. Also, you would never know how your company is truly performing or the areas that need improvement. An efficient accounting and auditing process can offer many benefits to businesses. Today, we will talk about these processes and look at the reasons behind their importance.
Accounting and Auditing
Accounting, in the most general terms, covers a wide range of things like record keeping, managing the flow of money, etc. Auditing, on the other hand, is the process of checking if the business is conforming to the laws, rules, and general accounting principles.
Accounting and Auditing: The Importance of Accounting
Accounting is a critical part of any business and includes income and expense tracking, compliance with the laws, and offering structured financial information about the business as required. Primarily, your financial records generate three types of statements:
- Income Statement – offering information about the profit and loss of your business
- Balance Sheet – offering a bird’s-eye view of your financial position on any given date
- Cash flow Statement – providing information about the generation of cash and areas where you spent it
Here are some reasons that make accounting important for your business:
Helps in analyzing the performance of your business
A well-maintained record of the finances of your business allows you to understand the efficiency of your operations. You can keep track of all the expenditures and debts and also compare data to help you with budget allocation.
Helps ensure compliance with laws and rules
Businesses have several compliances to follow. Without a structured accounting process, you can miss out on some important rules and bear the consequences like penalty/fine, etc. Hence, having a good accounting process is important.
Accounting and Auditing makes budgeting effective
Budgeting is crucial for the success of a business. In fact, it can make or break a business. And, having access to structured financial records play a huge role in creating a sound budget. You can use this financial data to identify trends that can help keep your business profitable.
Makes filing financial statements easy
Depending on the type of business entity – sole proprietorship, partnership, LLP, company, etc., there are certain requirements for filing financial statements with the authorities. Accounting processes make filing easy.
Accounting and Auditing: The Importance of Auditing
Auditing is a systematic review of financial statements, accounts, reports, records, etc. It helps in determining the integrity of the entire accounting system of the company. While in some instances auditing is mandatory, it is recommended to audit your business even if it is optional. Here are some types of audits that you can conduct:
- Financial Audit – This helps determine if the financial statements of your business accurately represent its financial operations. It also analyzes if the accounting processes followed are in sync with the general accounting principles.
- Compliance Audit – This helps understand if your business has worked in accordance with the rules and laws that can impact your financial statements.
- Economy & Efficiency Audit – This audit can help you understand if your business manages its resources efficiently and economically. It also helps identify the cause of any roadblocks that you are facing.
There are many other types of audits that businesses conduct. Here are some reasons that make auditing important for your business:
An assurance of the accuracy of the book of accounts
Auditing helps owners, shareholders, and investors feel assured about the accuracy of the book of accounts. Depending on the type of audit conducted, the stakeholders also feel assured that the process and records are checked for errors and efficiency by a professional.
Discovering frauds and errors
If someone is trying to defraud your business, then an audit of the entire business is the best way to detect it. Further, it can help save your business from a potential loss. Also, a regular auditing process can deter such people from committing fraud due to the fear of being caught. On the other hand, auditing can also help identify innocent errors (done without the intention of fraud) and make your processes better.
External Audit can offer an unbiased point of view
While internal auditors are also effective, their presence within the organization can bias their opinion. However, an external auditor can offer a completely unbiased point of view.
For a successful business, accounting and auditing are essential even if not mandatory at all times. While you work hard to establish your business, without efficient accounting and auditing practices, you might not succeed in making it truly successful. Review your business and incorporate these processes today!