Dear Entrepreneurs this title may sound very odd to you. And why not so when most of the Business gurus, Business Owners, Management consultants consider Marketing / Finance / Production / Service to customer etc. as the core areas of any business.
But being a Practicing Chartered Accountant I can tell you that most important part of any business is maintenance of proper accounting system. However, in reality this is the most neglected and low priority area of Business. And the accounting staff is generally underpaid and rarely promoted.
Accounting today is no longer a traditional bahi-khata. With the advent of Computers, Accounting Software, Information technology it has evolved to a great extent. Now it has become the most important source of Management Information System (MIS).
So accounting is not only the “Accounts keeping” but it’s the most important functionality which can be used to counter this competitive world.
I am listing some of the important things which can be efficiently done with the help of proper accounting system:
1. Decision Making: Various decisions relating to Purchase / sale / Finance / Expenses etc can be taken on the basis of Accounts only. If the same are up to date then decision making can be fast and correct.
2. Receivables: Recovery can be tracked very easily. Reminders can be sent through software.
3. Inventory Management: Inventory position will always be available. Timely orders can be placed for purchases. Orders can be taken for sale. A check can be kept by regularly verifying physical records with book records.
4. Profitability of business: Product/Services profitability can be ascertained. Analysis can be made. Comparisons can be made period wise, product wise etc.
5. Costing: we can work out the direct cost, indirect cost, product / service cost.
6. Legal Compliances: Various legal compliances relating to GST, Company Law, Income Tax, TDS etc can be done if regular correct accounting is done. It saves us from huge late fee, penalties and wrong filing of returns.
7. Business Status: by the use of good accounting software we can have various types of reports on any day of the year: such as Balance Sheet, Profitability, Ratio Analysis, Outstanding balances etc.
8. Capital contribution in business: to keep the track of capital contribution done by owners.
9. Weaker Areas: We can pin point the various grey areas in business such as old Debts, slow moving inventory, huge Interest cost, late payments to creditors resulting in costly purchases etc.
10. Non-Profitable activities: with proper use of accounting software we can have the profitability product wise, segment wise, territory wise, sales agency wise etc.
11. Segment wise status: a company may have different segments for example Restaurant, Sweet Shop, Amusement park, Lawns etc. Accounts can provide us the details of each segment separately.
12. Tab on expenditure: By regularly monitoring the expenses we can have a check on various expenditure.
13. Security of Assets: As accounts can give us the accurate information about the assets of the company, we can regularly have a physical check of the same.
14. Prevention / detection of frauds: Though It require a little expertise but accounts can help us in detecting any frauds relating to misappropriation of cash, inventory, sale proceeds, theft of assets, banking frauds etc.
15. Cash Management: cash / bank balance should not remain idle. Cheques issued should not bounce.
16. Information to Financing Institutions:Lending banks / financing institutions periodically requires various information If the same is not given timely our credit rating is affected resulting in higher interest rates and restrictive lending.
17. Settlement of Accounts between owners: Accounts of owners (Partners/directors) have to be settled periodically. there may be Incoming or outgoing of Partners/ Directors which may require settlement of accounts. It also removes the chances of disputes between them.
But if wish to expect the above mentioned objectives following practices should be implemented in the Accounting System :
1. Real time up dation of accounts: Transactions should be immediately recorded. There can be automatic entries on generation of vouchers.
2. Correctness of entries: there may be punching errors, same can be minimised and corrected with the help of various inbuilt controls. Regularly go through the Trial Balance, it will help in rectifying the mistakes.
3. Preparing robust Accounting Master: A onetime expert help can be taken to create the accounting master and training of accounting staff. It will reduce the recurring time in maintaining the accounts, full use of software, easy legal compliances etc.
4. Providing clear information to Accounting department: Management should provide full details of the transaction to the accounting staff. So that correct treatment can be given in accounts.
5. Adhering to the Accounting system: Every one in the business concern should cooperate with the accounting department and follow the system set there in. for example passing of bills, credit limits, invoicing, issuing payments, Documentation etc.
Maintenance of Accounts is not a very costly affairs but not maintaining the same properly costs a lot to the enterprise. This thing needs to be understood.
And last but not the least never keep a backlog of accounts, it is very difficult to record and correct the old transactions, entries. Always better to keep the accounts updated.
Author : CA Satish G. Sarda, Practicing Chartered Accountant, Past Chairman – Nagpur Branch of ICAI, Email: firstname.lastname@example.org