What is the importance of accounting

What is accounting?

Accounting is the process of summarising, analysing, and reporting financial transactions about a business. In accounting, financial statements are used to summarise a company’s operations, financial position, and cash flows.

Accounting plays a vital role in the smooth operation of a company. It is useful for both the daily activities and the long term planning of a business. This is because it helps you track income and expenditures, ensure statutory compliance, and makes it easy to share financial data between investors, management, and government

The language of accounting can be a little intimidating, but it’s not that hard to understand. The key is to think of the information provided by your books as clues. Clues to what? Clues to how your business is doing – and where you need to focus your attention next.

Tallying up the numbers and making sure everything adds up is certainly important, but it’s only one part of the accounting process. There are a few other things you should be doing while you’re reviewing your accounting records:

  • Comparing this month’s numbers with last month’s and last year’s. If something looks off, don’t assume anything; look into it further and check every cash memo before taking action.
  • Looking for ways to improve performance. Watch for trends in your sales numbers and costs; try to figure out why those trends are occurring, what you can do about them, and whether those changes will ultimately improve your business.—and then make those changes!
  • Identifying growth opportunities. See if there are any areas in which you could expand—and grow—your business. And then do it!

Financial and managerial accounting are the two main types of application areas of accounting. While both adhere to the three golden rules of accounting, Financial accounting is concerned with preparing financial statements for external users who require the information for investment and credit decisions. Managerial accounting is concerned with planning, controlling, and evaluating the internal operations of a business. Click here for more info.

Here are some of the essential reasons why accounting is crucial for businesses of all types and sizes:

1.Helps check how the business is doing

The financial records formed in the process of accounting give a clear picture of a companies financial health. It gives an insight into the expenses, debts and margins along with the progress that has been made since the previous assessment.

2.It can ensure compliance.

Rules and regulations vary across industries and state however if a business has a proper and well-functioning accounting system in place then corroborating with regulatory compliance mandates become a lot easier.

3.Helps in preparing budget and projection

The process of budgeting and making projections can be vital for the future of a company. If done incorrectly it can severely damage it. These estimates are done on the previous data of the company which could be easily availed if a company’s accounting systems are efficient.