All businesses operate with a budget and the only accurate way to do so is by having a system that helps track the cash flow of the business. This means the money owed to the business as well as the expenses and the debt created through financial loans and the purchase of goods or services that add to the operation to the business, also known as liabilities. The following categories are pertinent to proper bookkeeping.
The budget is a strategic spending plan that a business, owner, managing team, or board of directors, puts together that allows the operation of the business to function. When all accounts are correctly recorded they are compared to the budget, according to the aspect of spending and earnings. This helps plan for a growth in the budget or a reduction in the budget because of losses or gains that may have occurred directly affecting the earnings for a given fiscal period.
Bookkeepers and accountants track the cash flow of a given business. The analysis of the business’s financial health stems from the information collected through the bookkeeping and accounting process. The cash flow of a business is the spending and the earnings, in basic terms. Granted the reason that accurate bookkeeping is necessary is that there are many different revenue streams that funnel money into and out of a business. This brings us to the next category.
Taxable Income and Deductions
Accordingly, this financial tracking takes place on a daily, weekly, bi-weekly, and monthly basis, which adds up to the annual financial picture. Therefore, when the financial health of an organization becomes important is at tax time. The bookkeeping and accounting system, when they are accurate will show the true taxable income revenue of a business as well as give insight into what expenditures may show as deductible thus lowering the taxable income, similar in nature to personal taxes. However, this is where keeping up to date on current tax laws would help, leaving the last category.
Depending on the size of a business entity the company’s payroll can get very complicated. From this aspect having accurate bookkeeping pays off because payroll is an expense that comes from the earned revenue of the business. In addition to this, it provides the ability to track bonuses paid, commissions, or other incentive type payments to employees or consultants. In the same instance being able to track the amount of revenue that goes towards payroll ensures that the distribution is correct among everyone involved.