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Small business accounting and finance

Importance of accounting for small business

In order to determine the financial position of a small business accounting and finance it is necessary to maintain a system of accounting. Financial accounting records all the transactions occurred during the year. To understand the significance of accounting in the course of business events the following example is illustrated.

In our daily lives without realizing we do some accounting. If you wish to go out with your friends for dinner, you suddenly find your wallet empty. You then recall how you spent your money for the last time. Then you remember that you purchased three sets of management books for your MBA syllabus. But you are not able to revise about the remaining portion of the money. If you had systematically recorded the total expenditure incurred last week then you would exactly know the amount spent. There are many other advantages of keeping a regular record about the outflow of cash in our routine life. You can keep control over your spending habits. Perhaps if you had recorded the amount spent after every purchase then you would have spent reasonably. You would not face the problem of being cash trapped at an important time.

Accounting is a perfect method of recording the past financial events with a view to interpret the resulting summary. Without small business accounting and finance it is not possible to know how to owe neither to your creditors nor about your debtors. You will not be aware about the written down value of the asset for the current year due to the accumulated depreciation. The shareholders will not be paid dividend on time and thus you lose investors. It is impossible to comply with the legal formalities without any evidence of past financial events. Without able to determine the financial position of the business you cannot prosper in the future.

Accounting is an art of recording, classifying and summarizing transactions that are of financial character. As the role of accounting has changed over the years, today it is the process of identifying, measuring, and communicating economic information. Financial accounting facilitates the management in making economic decisions. Today accounting is not only confined to financial accounting but is spread into several branches like cost accounting, management accounting.

The main objective of cost accounting it is to minimize the cost of production and thereby increase profitability. The primary function of management accounting is to provide financial information to the management for decision-making.

The common strategy of all the three systems of small business accounting and finance is to enhance the companys prospects. Accounting is the best know language of the business that communicates the results of the business. The management uses the accounting statements to aid further decision. There are many types of analysis prepared by them such as Ratio analysis, funds flow statements, cash statements and comparative statements. Ratio analysis is a technique of interpreting financial strengths and weaknesses. For eg: when we divide current assets by current liabilities for the current year, then it is known as the current ratio. It determines the liquidity position of the business. It establishes mathematical relationship between one ratio to another. Cash flow statements indicate the total cash inflow due to the income gained and total cash outflow due to expenditure incurred both capital and revenue.

Inventory accounting is an important aspect of management accounting. The supply of materials should be continuous and should not interrupt the process of production. Neither the level of inventory exceed the maximum level because it leads to blockage of working capital, loss due to obsolescence or deterioration in quality etc. when materials or the stock is issued to the production department there are different methods for valuing materials like LIFO, FIFO or average weighted method.

Financial statement is a compilation of data, which is logically and consistently organized according to the accounting principles. The aim of cost accounting is to control cost at

each step of production process. In merchandise accounting system it is easy to determine cost of sales but it is not easily ascertained in cost accounting. But when cost sheet is prepared we get an idea of cost per unit. In cost accounting total selling costs are bifurcated into prime costs i.e. the cost of materials, factory costs, administrative costs and selling costs.

Depending upon the nature of the small business accounting and finance, the system of accounting also varies. For works like fabrication where materials are supplied by the customers and job is undertaken according to the specification of the customer, a job cost is prepared. The costs are incurred for materials, wages and overheads.

In management accounting budgetary control is a tool for planning and control. A statement of budget is prepared in advance of different departments in order to predict the future financial position. It is based on historical data. The management compares the actual performance of the business with the predetermined standard and if any deviations are found corrective actions are taken. The management accounting is very useful in spotting out the areas of inefficiency so that suitable actions can be undertaken.

But there are few limitations of all the accounting systems. If the financial data is not accurately provided to the management then management accounting will not provide correct analysis. While accounting there are many other subjects that need to be considered like statistics, economics, taxation laws etc. accounting will be perfect only if the accountant is aware of all the related subjected.

The main functions of management accounting are as follows:

It is useful for establishing and administering tax policies. It prepares reports for the government agencies as required by the law. It protects the assets of the business by the methods of internal controls, auditing and proper insurance coverage. It determines to what extent the economic, social and government affect the business.

The total cost can be defined as the resources consumed to accomplish a specific objective and the profit is the difference between the sales and expenses or expired cost. Broadly speaking, collecting, assimilating, analyzing, and communicating the information to the management to meet a specific objective is known as management accounting. In simple words providing costing information to management and assisting them in making decisions is known as Management Accounting.

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