Why Accounting Is Important for Businesses ?

Accounting is defined as the recording of financial transactions plus storing, sorting, retrieving, summarizing, and presenting the information in various reports and analyses according to Harold Averkamp meanwhile Investopedia defines accounting as the systematic and comprehensive recording of financial transactions pertaining to a business. Furthermore, accounting also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies, regulators and tax collection entities. 

In layman term, accounting is a process of recording, summarizing, analyzing and recording of financial transactions of an enterprise. Accounting is often referred to as “Language of Business” (EduPristine, 2018).

The accounting information is very important for the management to make informed decisions. Management cannot make decision without reasonable information’s for backing it up. Accounting gives the management the information regarding the financial position of the business, such as; profit and loss, cost and earnings, liabilities and assets, etc (Importance of Accounting, n.d.).

The role of management is very important in the overall development of a business organization. The functions of management are planning, organizing, collecting business elements, motivating, coordinating, controlling and budgeting etc. Successful completion of these functions of management depends on an efficient accounting system (Importance of Accounting, n.d.).

Importance of Accounting

1. Planning

Proper planning is very much needed for successful completion of various management activities. This planning’s cash planning, sales planning, procurement planning, determining the quantity of stock, development planning, fixing up target-profit etc. are very much dependent on accounting data and information (Importance of Accounting, n.d.).

2. Organization 

Accounting helps management-organization by providing information like percentage of profit over the capital, capital investment position, management efficiency in controlling etc (Importance of Accounting, n.d.).

3. Motivation 

Employees are to be motivated for achieving expected performance. Financial reward is one of the main motivating factors of work (Importance of Accounting, n.d.). 

The management is to be aware of the financial position of the business for providing financial benefits. Accounting helps the management by providing necessary information for taking proper decisions (Importance of Accounting, n.d.).

4. Co-ordination 

One of the main functions of management is to achieve the final target of the business by coordinating various activities of different departments. Accounting helps in coordinating various activities of different departments of the business. It also helps the management in the adjustment of purchase with sales, an expenditure with income, sales with debt receivable realization etc. to a great extent (Importance of Accounting, n.d.).

5. Control 

Controlling is essential for completion of activities according to plan. Accounting can help management much in control (Importance of Accounting, n.d.).

6. Media of Communication 

Accounting plays a vital role as a media in communicating various information from different departments, business, and management plan of actions to various departments. For instance, accounting is regarded as the best media of communication in supplying information to management regarding purchase and stock, time of purchase, cost of purchase and sales price etc (Importance of Accounting, n.d.).

On top of that, the function of Accounting is to collect and provide information about the business to various interested parties (Importance of Accounting, n.d.).

7. Professional Advice

An efficient and honest accountant helps the management with valuable professional advice for the development of its business. The efficiency of management depends on the efficient use of accounting data and information. In the developed countries accountants are regarded as efficient and successful managers (Importance of Accounting, n.d.).

Accountants are included in the management committee in large corporations. It can be said that accounting and management are interdependent. Accounting is an essential tool of management (Importance of Accounting, n.d.).

8. Financing and Investment

In order to get any loan from the financial institution, financial statements will be scrutinized carefully and thoroughly before landing to a decision of awarding loan (Importance of Accounting, n.d.).

Accounting helps in making investment decisions. Through the analysis of financial data, investors can ascertain if it would be worthwhile to invest in a business (Toluwalope, n.d.).

9. Identify Errors

Accounting enables errors that occur during the book keeping stage to be detected and corrected, and also ensure that various reconciliatory statements for example bank reconciliation statements, and control accounts are prepared. Preparation of these reconciliation statements help to reduce omission and misrepresentation in the financial information prepared and presented (Toluwalope, n.d.).

10. Evaluating the Performance of Business

Accounting measures the success or failure of a company. The accounting information reflects the results of operations. Various balance sheet and profit & loss accounts ratios are calculated which help user of financial statements to analyze the performance of an entity. For example debt equity ratio, current ratio, turnover ratio etc. Users can also compare previous period accounting data with current period as well as budgeted figures for variance analysis (EduPristine, 2018).

It also helps the business make critical decisions such as pricing decisions, product mix decision, shutdown or liquidation decisions and merger or acquisition decisions (Toluwalope, n.d.).

11. Manage and Monitor Cash Flow

The working capital and cash requirement of an enterprise can be duly taken care by proper accounting system (EduPristine, 2018).

12. Helps Business to be Statutory Compliant

Proper business accounting ensures timely recording our liabilities which needs to be paid within the prescribed time line. This includes employee provident fund, pension fund, VAT, GST, Sales & Service Tax (SST) and income tax. Timely payment of liabilities helps enterprises to be statutory compliant (EduPristine, 2018).

13. Create Budget and Future Projections

Accounting data helps an enterprise to prepare budget and forecast for future period. Business trends are projected based on past data produced by accounting system (EduPristine, 2018).

14. Filing of Financial Statements with Regulators, Stock Exchanges and Filing of Tax Returns

Enterprises are required to file the financial statements with ROC. In case of listed entities the same is required to be filed with stock exchanges as well. For both indirect and direct tax filing purposes, financial statements and other financial information are required (EduPristine, 2018).

15. Other information

The accounting system provides a number of qualitative and quantitative customized reports which are required in day to day business activities (EduPristine, 2018). 

Consequences of Accounting Failure

Early 2000 witnessed a series of accounting frauds in United States involving major companies like Enron, WorldCom and some other entities and Auditing firm Arthur Andersen. In these cases, independent auditor failed to report illegal accounting practices. Such accounting fraud and scandals resulted in fall of Arthur Andersen. Post such scandal Sarbanes and Oxley Act was introduced in United States of America. This act requires top management of an enterprise to certify the correctness of financial statements, auditor’s independence and formation of Public Company Accounting Oversight Board (PCAOB) among other things (EduPristine, 2018). 

Similar accounting fraud was witnessed in India in January 2008 when Satyam Computer MD publicly accepted that he along with top management and independent auditors had fudged books of accounts of the company over several years (EduPristine, 2018).

The Bottom Line

Accounting not only helps an enterprise to conduct its day to day activities smoothly but also helps in its future growth. At the same time financial statements produced by various accounting systems are used by multiple stakeholders to take economic decisions. Proper reporting and accounting practices helps in maintaining investors’ confidence and brings economic growth as well (EduPristine, 2018).

Accounting aids management in planning, organization, motivation, coordination control, budgeting. Accounting delivers the financial and economic information that an organization managing process is needed (Importance of Accounting, n.d.).

In this competitive business world, management has to be swift and dexterous in its decision making (Importance of Accounting, n.d.).

Edited by: 浪子

Bibliography

Harold Averkamp. (n.d.). What is Accounting? Retrieved from 
https://www.accountingcoach.com/blog/what-is-accounting

What is Accounting. (n.d.). Retrieved from https://www.investopedia.com/terms/a/accounting.asp

EduPristine. (2018). Importance of Business Accounting for Enterprises. Retrieved from 
https://www.edupristine.com/blog/importance-of-accounting-for-businesses

Importance of Accounting in Management Decision Making. (n.d.). Retrieved from 
https://iedunote.com/accounting-management-decision-making

Importance of Accounting. (n.d.). Retrieved fom 
https://www.globalfinanceschool.com/blog-post/importance-accounting

Toluwalope. (n.d.). Importance and Function of Accounting. Retrieved from 
http://www.gemanalyst.com/importance-and-function-of-accounting/