The Uses of Accounting In A Small Scale Business

No business can succeed in the long term without knowing exactly where its profits come from, what its expenses are and how much it's making and spending each month--it needs accounting. But some small-business or home-based-business entrepreneurs neglect any sort of accounting, believing that their businesses are too small to need it. Without at least some basic accounting, though, decisions and daily activities are based on guesses--not facts

Current Financial Snapshot

• A small business's accounting provides an instant snapshot of the business's current financial condition, identifying whether it has any cash on hand and whether its debts and liabilities exceed its current cash and receivables.

Decision-Making Information

• Small business accounting provides the critical financial information necessary for making sound business decisions, from determining how much product to buy to guiding what wages the business can afford to pay.

Budgeting

• Accurate accounting allows small businesses to budget for the upcoming month, quarter or year. The planning that creating a budget requires also serves to warn the business owner of upcoming cash-flow problems and periods of especially weak or heavy demand.

Financial Reports

• Accounting generates the small business's financial reports, which provide essential information about the business's performance to interested outside parties such as investors, creditors, lenders or government departments involved in tax collection.

Audit Trail

• Small business accounting inherently creates a record of historical transactions, which enables the business owner or an outside financial professional to audit the books for errors or signs of fraud.

Tax Liability

• The small business's accounting provides the means for the business owner to determine his tax liability in regard to sales taxes and personal or corporate income taxes.