Accounting refers to the systematic and comprehensive recording of financial transaction of business. Accounting Information is vital to many stakeholders in economic decision making.
Example of stakeholders who use accounting information includes management, government, shareholders, suppliers, tax authorities etc. Business accounting help in making strategic and tactical decision making that help business to grow or penetrate in markets.
Need for Accounting
Accounting help management to determine the financial position of the organization. The financial report helps the management to know the current position of a business and also assist them what will be the position of an organization in a specific time. Accounting assist management in planning, decision making and controlling processes in an organization.
This help in running the business efficiently and effectively.
Accounting helps business in recording, classifying and then summarizing all the transaction in an organization. This allows the business to come with a well assessed financial document such as balance sheet, statement of profit and loss, statement of cash flows and trail balance when all accounting is account for all business transactions.
Importance of Accounting in Business
For every business, budgeting is a key factor. Budget planning help business to develop strategies, save money and observing any expenses that exceed the budgeted amount. In order to make a budget for a business, a business needs certain previous records. This will only be possible if records are maintained through accounting because they form the basis for planning and budget makings.
Banks and lenders
To get a loan from a financial institution, you need to provide a financial statement. To make a financial statement, you need to have a proper accounting system. Various books of record such as profit, expenses, assets and liabilities, tax paid need to be maintained. The financial institution will then scrutinize in detail in order to provide a loan to the organization
The organization needs to have a record of their transaction to run the business smoothly. To do so, accounting play a key role in keeping records. These records are collected, organized and then interpreted them to communicate to end users.
Accounting in decision making plays a key role. For this business organization need a financial statement. A financial statement is made as a result of the accounting system. Executive management cannot make a sound decision if there is no proper record of accounting in business organization and hence it is impossible for them to achieve organization objectives.
Many stakeholders need financial information in the form of a financial statement. Example of stakeholder that need financial information are investors, creditors, government, debtors, customers and employees. The investor will move away if the organization is lack of financial records and accounts. They need this information to know about business progress.
Reporting Business Profits
The main objective of a business is to make a profit. In order to ascertain whether a business is making a profit or not, must need to maintain accounting system regardless of organization size. This enables interested parties to make a decision on the growth of business output.
Monitoring Cash Flow
Well prepare accounting systems helps in managing of working capital requirement and other cash requirements within an organization.
Proper accounting system ensures timely recording of liabilities and which to be paid within the time frame. This may include pension fund, provident fund, sale tax, VAT and income tax. Timely payment of these liabilities helps business to the statutory complaint.
Listed companies required to submit a financial statement to stock exchanges. For both direct and indirect tax filing purposes, financial statement and other financial requirements must be provided to tax authorities. Such information can only be provided if proper accounting record is maintained within a business organization.
PREVENTION AND Detection OF FRAUD
In order to prevent and detect fraud, good internal control in place is required within the business organization. Good internal control can only place where a proper record of events is taken place. The only way to maintain and keep track of transaction effectively and efficiently is to implement accounting and accounting system within the organization.
Planning and Forecasting
To expand a business, an organization need more finance to support this expansion. For this bookkeeper look at the financial statement which type of finance they need. At the end of the year, the business needs to distribute profit to investors.
Chief finance officer then considers how much to distribute to investors, how much debt to be paid off and how much reserve in the form of cash need to be maintained for expansion and any other future need.
Such planning and forecasting can only be achieved if proper accounting and accounting system are maintained in a business organization.
Improved Payment Cycles
Another reason for preparing and keeping accounting and accounting system within a business organization is to enhance the business payment cycle such as payable and receivable cycles.
Investors share on profit need to be determined, daily wages and monthly salaries need to be calculated and payment should be made to lenders on a timely basis. Payment cycle can only be improved if proper accounting system is implemented within a business organization.
Credit building and reputation
Credit building and reputation are established by implementing and operating a sound accounting information system within a business organization. It is believed that when there is an efficient accounting system in an organization, all another aspect of business operation is effectively managed.
As stakeholder make their decision on the basis of the financial statement, it must be clear and easy to understand. The investor does not take a risk on the incomplete and complex financial statement.
Any information such as profit before interest and tax, profit after tax, depreciation and amortization are some information that is vital information to stakeholders and shareholders.
These need to be accurate because any difference in these can make a huge difference. Therefore transparency is a key factor to represent this information which can only be achieved if all business transaction is recorded and maintain in the accounting system.