July 20, 2024

What is the importance of accounting


In order for a business to function properly, it needs reports, records, data, analysis, and accurate information about debts, assets, profits and liabilities. This need of businesses is fulfilled by accounting.

Accounting is one of the most important functions of any business which can be effectively handled by the use of an accounting software. Following are some reasons why accounting is important:

Accounting Gives Information

The information that we obtain from accounting is important for both making decisions as well as the management of an organisation. It is only on the basis of accurate facts and figures that critical financial decisions can be taken. Irrespective of the management level at which decisions need to be taken, information is crucial.

The information which the management seeks to become aware of the business’s financial position is provided by accounting and this information includes cost and earnings, profit and loss, assets and liabilities, etc.

It is statistical information and data upon which a management relies to make the right decision and accounting can be considered to be the only reliable source for this information. The primary objective of accounting is to record financial transactions in the account books in a systematic manner and to determine the financial position and profit loss of a business.

Functions of Accounting

The main functions of accounting include analysis and interpretation of accounts and statements, ascertainment of financial position and profit-loss, collection of economic and statistical data, development of accounting system, controlling results and financial planning as well as formulation of financial principles, amongst several others.

Due to management and entity concept, developed means of communication, joint stock company and international business, the scope of business has expanded to an extent that the management has no choice but to depend on various accounting and data information to take any kind of financial decision.

With accounting, production and profits can be increased, misuse of assets can be prevented and costs can be controlled effectively. These factors increase the overall efficiency of an organisation. With better management practices, it becomes possible to take your business to greater heights of success.

The functions of management include organising, planning, coordinating, motivating, collecting business elements, controlling and budgeting, to name a few. An efficient accounting system ensures that these functions are successfully completed. An accounting system identifies various economic events, records, analyses and compiles them to reveal the true financial position of a business entity.

Planning Budget

In every business, budgeting is a core factor. Businesses that want to save money, make strategies and identify any hike in expenses need to plan their budgets. A variety of previous records are needed to make a budget. To access this information, the documents containing them need to be well preserved through efficient accounting. This information forms the basis on which budgets are planned and created.

Lenders and Banks

When a company applies to a financial institution for a loan, they need to present a detailed report on their financial status. The facts and figures mentioned in these reports need to be accurate and cannot be arrived at through guesswork.

A proper accounting system is needed to be able to present the various books of records which are needed to prepare the reports such as assets and liabilities, taxes paid, profits recorded, etc. These reports will be carefully scrutinised by the financial institutions and they will try to learn more about your company through these figures before arriving at a decision whether you should be awarded the loan or not.

Keeping Records

In order to run a business smoothly, the organisation needs to keep records and act upon them. In this aspect of management, accounting plays an extremely crucial role in keeping records. All records need to be collected, organised and interpreted so that the relevant information can be communicated to the end users. This information is later used to make economically viable decisions which are responsible for boosting the productivity of an organisation.

Decision Making

Any decision which is concerned with the economics or finances of a business organisation must be made on the basis of the financial statements of the organisation. Accounting helps in the creation of these financial statements and in the absence of proper accounting, sound financial decisions cannot be made by executives. Making financial decisions without accurate data is akin to shooting arrows in the dark and this makes it difficult for them to achieve the objectives of an organisation.

Information to Investors

Accounts and financial statements are not just important to run a business smoothly or to acquire funding, but also for the sake of representing the organisation to stakeholders such as creditors, debtors, government, customers, investors and employees.

Organisations that fail to produce financial accounts and records of their business are not considered to be trustworthy and such an organisation may not be successful in winning the confidence of investors. If investors are not able to gauge the financial progress of your business, they may not express much interest in financing your venture.

To Report Profits

Needless to say, the primary objective of any business is to make profits. Every business, irrespective of whether it is small or big, needs to maintain an accounting system to keep track of the profits or losses that their business transactions are making. Based on the profits that they are making, important business decisions concerning the productivity of the company are made.

Monitoring and Managing Cash Flow

To take care of cash requirements such as working capital or any other, proper accounting systems within business organisations is needed. Accounting keeps proper track of the money that comes in and goes out of an organisation, thereby monitoring the cash flow of a business. By keeping a close eye on cash flow, accounting reveals many important details regarding the financial health of an organisation such as accumulation of debt, defaulting customers, unnecessary expenses which can be curtailed and many others.

The importance of accounting extends well beyond the reasons which have been given above and any organisation which aims to grow and function in an organised way must put in place an efficient accounting system.

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