Importance of Accounting in Business

Accounting refers to the systematic and comprehensive recording of the financial transactions of a 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 markets.

Need for Accounting

Accounting help management determines the financial position of the organization. The financial report helps the management to know the current position of a business and also assists them in what will be the position of a company at a specific time. Accounting assist management in planning, decision making, and controlling processes in an organization.

This helps in running the business efficiently and effectively.

Accounting helps businesses in recording, classifying, and then summarizing all the transactions in an organization. This allows the business to come up with a well-assessed financial document such as a balance sheet, statement of profit and loss, statement of cash flows, and trail balance when all accounting is an account for all business transactions.

An expert accounting service provider helps businesses deal with their overall accounting needs and guides them on preventive measures to reduce tax liabilities, and on ways to improve cash flow and business performance

Importance of Accounting in Business

Budget Planning

For every business, budgeting is a key factor. Budget planning help business develop strategies, save money, and observe 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 making.

Banks and Lenders

To get a loan from a financial institution, for example, if you want to go for ERTC Funding or a business loan, 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, and tax paid need to be maintained. The financial institution will then scrutinize in detail in order to provide a loan to the organization

Records Keeping

The organization needs to have a record of its transaction to run the business smoothly. To do so, accounting plays a key role in keeping records. These records are collected, organized, and then interpreted to communicate to end-users.

Decision Making

There are different types of decision making being a manager. Accounting in decision-making plays a key role. For this business, the organization needs 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 organizations and hence it is impossible for them to achieve objectives.

Investors

Many stakeholders need financial information in the form of a financial statement. Examples of stakeholders that need financial information are investors, creditors, government, debtors, customers, and employees. The investor will move away if the organization is lacking 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, just needs to maintain an accounting system regardless of 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 working capital requirements and other cash requirements within an organization. Monitoring your cash flow is vital for you to know if your business is struggling or progressively increasing. Keeping track of your in and out money like your bills, employee’s salary, miscellaneous expenses, etc. will also help you to identify profit opportunities. A good accounting system will lead you to a better understanding of how your business runs.

Statutory Complaint

A proper accounting system ensures timely recording of liabilities and which to be paid within the time frame. This may include a pension fund, provident fund, or a few or all taxes including the sale, VAT, and income. Timely payment of these liabilities helps businesses to the statutory complaint.

Help in filing a Financial statement to Stock Exchanges and Tax Authorities

Listed companies are required to submit financial statements to stock exchanges. For both direct and indirect tax filing purposes, financial statements and other financial requirements must be provided to tax authorities. Such information can only be provided if a 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 be placed where a proper record of events is taken place. The only way to maintain and keep track of transactions effectively and efficiently is to implement an accounting and accounting system.

Planning and Forecasting

To expand a business, an organization needs more finance to support this expansion. This bookkeeper look at the financial statement and which type of finance they need. At the end of the year, the business needs to distribute profit to investors.

The 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 needs to be maintained for expansion and any other future needs.

Such planning and forecasting can only be achieved if proper accounting and accounting systems are maintained in a business organization.

Improved Payment Cycles

Another reason for preparing and keeping accounting and accounting systems within a business organization is to enhance the business payment cycle such as payable and receivable cycles.

Investor’s share of profit needs to be determined, daily wages and monthly salaries need to be calculated and payments should be made to lenders on a timely basis. The payment cycle can only be improved if a 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. It is believed that when there is an efficient accounting system in an organization, all other aspects of business operation is effectively managed.

Transparency

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 is 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 maintained in the accounting system.

Denis Woods

Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.