Why is it Important to Prepare Financial Records?

 As businessmen and businesswomen, it is a primary area of concern to maintain your finances in order to determine the health of the business. It is an aspect that can’t be overlooked as it forms the core of any business’s existence. A startup without financial planning is bound to fall weak as its foundation will not be strong. Deploying the right amounts of funds in investments and gaining from other borrowers needs to be a systematic transaction and should be recorded for various purposes beneficial to the company and its stakeholders. Before diving into why such records are prepared by every company, it is important to understand what financial recording means and how it is undertaken by organizations, both big and small. 

WHAT ARE FINANCIAL STATEMENTS?

Every person who manages a business, be it a sole proprietor or partner in the company must maintain a record of all the transactions that are undertaken by his/her company for fulfilling the ultimate objectives. These records are maintained according to the accountancy standards prevalent in the country. The Generally Accepted Accounting Principles (GAAP) are the foundation principles of these records and should be adhered to. When talking about records, these include the cash flow statements, income, and expenses, profit statements as well as the balance sheet of the company.
Companies located in China, India, Australia, and Canada follow the International Financial Reporting Standards (IFRS) to maintain such records. However, they impact the decisions of the same company due to differences in standardization. 

It is crucial from the point of view of both, the company as well as the third parties to be fully capacitated with the financial stability of the company before entering a contract. There are many advantages to maintaining these records. In the current times, various record preparing software has been developed to reduce human error and increase efficiency for this task. One can approach CA services for business to get in-depth knowledge and assistance of the same.

IMPORTANCE OF FINANCIAL RECORDS

Since these financial records play an important role in the practical day-to-day functioning of businesses they are of importance to all organizations. Some of the following benefits help us understand their vital role in the withstanding business.

  1. Income and Expense Identification – It often becomes difficult to track every transaction that happens by the minute. Therefore, maintenance of financial records ascertains cumulative data in order to separate the incomes and expenses of the business and non-business activities. It helps to generate accurate information about the source of income and receipts after separating taxable and non-taxable incomes.

  2. Managing Liabilities – It is safe to say that the capital requirement of businesses is a never-ending activity that needs to be dealt with precaution in order to maintain the stability of current liabilities. Thus, by choosing to store financial data in a systematic manner, companies facilitate easy scrutinization for decision-making when it comes to lending or borrowing money. If there are existing liabilities, that need to be reduced in order to pave way for expansion, the same can be done after surfing through these financial records. One can even employ CA services for businesses to read through the statements.

  3. Reliable Source of Information – For any third-party stakeholder, the financial records set the standards of the financial health of the company. It is important to make a proper record of all the company’s activities that led to losses or gains by the end of the financial year in order to facilitate the decision-making of vendors, creditors, and even lenders. These records paint the true picture of the organization and should not be tampered with.

  4. Financial Progress – The progress of a company is ascertained by the sustainability of gains and lesser losses in the long run. However, to arrive at this conclusion it is important to study the analytics of the company’s financial behavior through its records. It even helps in facilitating better means to earn a profit if the money can be put to better investment purposes after studying all the reports. Installation of financial reporting software develops accurate results to decide upon. CA services for businesses can also be used to help assist in any such shifting of funds.

  5. Cash Flows – The key performance indicators of financial stability are the ongoing cash flows. They ensure the survival of the business in this dynamic environment. Maintaining proper financial records will also help in ascertaining the sources and clearing out the ambiguity of these inflows. This will help the managers of the company to distinguish between cash flow for profits and liabilities from monetary movements in the process.

  6. Debt Management – Advanced documentation software installed for the purpose of providing financial reports and maintaining records helps in debt management. The ratio of current assets to current liabilities gives the estimate of debt and whether the company is presently in the position to cover it without interrupting any other financial activity. 

  7. Taxation – An accurately prepared financial record contains all the finances that a company undertakes in a financial year. Since the identity of the company is separate from its directors, there is a need to ensure a proper system of taxation. All the records necessary to be submitted while filing ITR are present in the company’s financial records like income from various sources, business and non-business, taxable or non-taxable. Consolidated storage helps in easy filing for which any CA services for tax can also be hired to assist upon the same.


Therefore, for any company, it is imperative to maintain financial records for the above-said benefits. Helping in many other ways, these records offer you first-hand insight into the investments and savings of your organization. Misplacing these expenses can create hassle while filing annual tax returns. Deciding upon expansion without having existing knowledge of your financial statements can prove detrimental to all the units of the business. It is also mandated by the Income Tax department to issue correct financial statements of the company annually. Fraudulent activities can be prevented by following these practices.

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