What Are the Importance of Income and Expenditure Accounts?

In regular life, almost every individual calculates and maintains a record of their monthly income against the expenses incurred each month. Similarly, businesses also calculate and record their income and expenditure for a predetermined period.

The main reason the organization prepares the income and expenditure account is to track all the transactions and thus, know the surplus earned and deficit incurred after a particular time. Now that hundreds of transactions are carried out every day in large enterprises, it becomes essential for them to prepare a well-formulated statement.

The below-mentioned points explain the importance of income and expense statement in detail:

• Revenue and Expenditure Information:

One of the significant importance is that under the best circumstances, they can indicate that the current levels of revenue generation from several different sources are sufficient for sustaining the business operations and paying back the debt. Moreover, the statement concerns their record and current trends. Concerned relevant details for their futuristic course of action are also provided in the report. This particular account not only lets the business know about their primary source of revenue but also loopholes where the company is spending a lot. This will help the business control its extravagant expenditure approach.

• Assists in optimum decision making:

Analyzing and interpreting the transaction statement lets business owners know about their company’s current financial footing. With the accurate figures presented in this statement, entrepreneurs can easily make optimum decisions about strengthening the company’s productivity.

• Tracking the organization’s financial health:

The organization’s financial standing can be easily known through it. The value of an income and expenditure statement, whether for the current period or as a projection for the period arriving soon, is said to have a basic idea about the company’s financial well-being. Because of this approach, it becomes possible to analyze basic information that might lead to changes in how the debts are managed or resources are utilized by the organization.

• Critical report for compliance:

When operating a business in a particular country, you must bear different taxes levied by the country’s government and comply with respective tax laws. Now that paying taxes is mandated by the law, the business will have to calculate its tax liability every year. Income and expenditure statements by providing necessary financial information contribute majorly when it comes to the calculation of tax liability.

• Advantageous for investors:

Investors of the company are always interested in its profits and losses. Now that huge funds are invested by the investors in the companies, they have the right to know about the concerned working and financial position. So it is by looking at the statement that investors can quickly understand the company’s financial health and thus, determine whether to invest further or not.

• Financial Management:

One of the main aims of preparing an income and expenditure account is to create a tool to help the company with financial management. For better control of the company’s finances, all types of transactions relevant to a particular period must be considered. This implies that it is essential that the company record not only all realized gains but also unrealized income. Similarly, when it comes to expenses, not only paid debt obligations but also unpaid debt obligations are to be recorded here. However, a few exceptions might be applied, such as excluding income generated by selling a capital asset or the revenue connected with a legacy.

Conclusion

Such transaction statements can not only be prepared by the companies whose motive is to earn a profit but also by other organizations, including societies, clubs, hospitals, and even charitable trusts to track the relationship between income and debt. With it, the company can quickly strengthen its financial position and thus, expand its business.