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The long-term benefits of financial accounting
People and society by
Posted on Sat, Jan 12, 2013 at 16:43 IST (last updated: Sat, Jan 12, 2013 @ 16:44 IST)
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I have no doubt that, having established a habit of keeping accounts, I have consciously and unconsciously adapted my mind to be aware of my cash inflow and outflow over a period of time. But being merely aware is just one thing; actually knowing the amount of cash inflow and outflow over a period of time is where systematic financial accounting scores. There is no guesswork involved. Noting down transactions as they happen let you know not only when, but why you spent and when you earn money.
The accumulation of data over time allows you to analyze. And analyze properly. A year's worth of book entries lets you know accurately your cash inflows and outflows, profits and losses, assets and liabilities, provided of course you've kept a clear record of every rupee spent. And then you can generate reports to find out which month of the year has been the most profitable and whether you spend more on saturdays or sundays.
I believe a major reason why people overspend is because they are not consciously aware of inflows and outflows. Credit cards have made it painlessly easy to spend large amounts without feeling the pinch of the wallet getting lighter (literally). Maintaining accounts (whether manually or through a computer program) is a great way to tackle this. For non-salaried professionals who rely on a variable income, this becomes even more important as planning large expenditures become necessary. Income tax is also a reason for self-employed professionals to keep accounts. Salaried people have it easy: their employer takes care of all the details, but professionals need to be disciplined in order to render proper accounts to the government. Knowing your income and expenditure makes it easier to identify those expenses which can be deducted from taxable income.
Long term benefits of accounting include the ability to accurately estimate certain types of expenses that recur periodically and draw up annual financial reports easily. Another benefit is analyzing your asset/liability, profits/losses over a period of several years in order to get an idea of where you are headed financially in the long run. These are just some benefits of accounting that are not apparent at first, but increase over time. With accounting software managing the nitty-gritty details, all that is required is one entry for every single monetary transaction and a basic knowledge of the principle of asset depreciaton.