Why Do Businesses Need An Accounting System? 

A reliable information system is a necessity for all companies. Companies must properly maintain accounts and detailed records or face unnecessary costs. A well-devised accounting information system, which ensures relevant and reliable information is reported in financial statements, benefits every type of company. 

Maintaining a set of accounting records is not optional, it's a law! The Internal Revenue Service (IRS) requires that businesses prepare and retain a set of records and documents that can be audited. Internal Revenue Code requires that business have the ability to compute taxable income by using some sort of common-sense accounting system that clearly reflects income. In addition, the federal legislation requires public companies to have a detail and accurate books, records, and accounts of transactions and dispositions of the assets.

If you decide to just blow off this requirement you might get away with your omission. But if the Internal Revenue Service examines your return and you’ve ignored the law, the IRS gets to do your accounting the way it wants. And the IRS way means that you pay more in taxes and that you also pay taxes earlier than you would have otherwise.

Beyond complying with the law, a company that fails to keep an accurate record of its business transactions may lose revenue and is more likely to operate inefficiently. You can’t successfully manage your business without the accounting system. Success requires the ability to perform financial analysis, which is to accurately measure business growth, profitability, and cash flow, as well as to reasonably estimate your financial condition.

To make smart business decisions, you need to have a good accounting system in place that provides a true picture of business performance. Management can answer many questions with the data provided by an efficient accounting information system. 

A good accounting information system helps management answer such questions as: What assets do we have? How much and what kind of debt is outstanding? Were the sales higher this period than last? Did we make a profit last period? Are any of product lines or divisions operating at a loss? Is the rate of return on net assets increasing? What were cash inflows and outflows? Is the cash flow enough to pay back debt? Can we safely increase our dividends to stockholders?

Your business must have a decent accounting system no matter how you feel about accounting and even no matter how time-consuming and expensive such a system is or becomes. The law requires you to have such an accounting system and successful business management depends on such an accounting system.

Tags: accounting system, income taxes, financial analysis

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