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Why is accounting important? What do you need to know? 16 December, 2020   

Bookkeeping and accounting are known to have been around just as long as humans have learned to engage in commerce and trade. It makes sense because if one decides to do business with each other in any organized way, then a systematic system needs to be kept to keep track of all those exchanges. It is where accounting comes into the picture. Double-entry bookkeeping is known to have emerged in medieval Europe. Big businesses utilize this along with small ones ever since. Today, however, thankfully, we have accounting software that can help manage the financial records, and one doesn’t have to rely on completing ledgers and spreading sheets manually. If you want to know the purpose of accounting and why it is important, you can go through this article.

Importance of accounting

If one has the question of why accounting is important in their mind, then here is its answer.

One of the accounting's main objectives is to systematically record all financial transactions in the books of accounts. One also needs to determine the financial position and profit and loss of business, indicating why accounting is important.

An ascertainment of financial position and profit and loss, analysis of accounts and interpretation along with the development of accounting systems, controlling and planning results as per plan, a collection of economic and statistical data and formulating of financial planning and principle are considered to be some of the main functions of accounting.

During this modern age, accounting is known to be directly relatable to financial management. Due to the management and entity concept, joint-stock company, develop means of international business and communication. The business scope has expanded so that the management is to depend on the various accounting information and data for making various decisions. Accounting does help in preventing any misuse of assets, helps in increasing profit and production. It also helps in cost control and also helps in increasing the overall efficiency of the management.

The role of management is considered to be extremely important in the overall development of any business organization. Functioning management includes organizing, planning, motivating, coordinating, collecting business elements, budgeting and controlling, etc. the successful completion of all of these functions of management completely depends on having an efficient account system.

Accounting is a continuous system that helps in showing the financial position of any business entity. Doing this is by identifying any of the economic events and analyzing, recording, and presenting them. Well, now, the question of why accounting is important needs to be described.

Things to know about accounting

As we already have gone through the importance of accounting, now let us look into some of the important things about accounting that one should know.

1. Categories of accounting

There are two categories of accounting. One being managerial accounting and the other being financial accounting. Financial accounting deals with the information made public to the stockholders, creditors, customers, and regulatory bodies. Managerial accounting is known to deal with information not shared with the public. It includes stuff like profits, salaries and also the cost of goods produced. The complete goal of managerial accounting is basically to help company supervisors and managers in making financial decisions. Financial accounting's actual goal is to provide important financial information about the company to those outside the business. For most of the small business owners, accounting means managerial accounting.

2. What does accounting allow you to do?

Accounting is essential if one wants to learn to grow their business in such a way that can be predicted and measured. If you are wondering why is accounting important, then you should know that to have a particular system of tracking one’s liabilities, income, and assets, allows you to be informed, smart business decisions which are based on the past performances along with the present financial health of the company. Having an organized, clear accounting system helps analyze the company’s financial data, but it also helps in growth and profit.

Sound accounting is also known to help in satisfying customers. Knowing where the company stands financially regarding expenses and income will better help you understand what one needs to do to maintain customer satisfaction and business growth.

Accounting helps the person tracking who owes you what and helps know what you owe to the other person. It also helps manage payroll records, tracks interest and loan repayments, attracts potential investors, maintain a budget, and set the person up with the necessary financial data they need.

3. Who handles your companies accounting?

It completely depends on the size of the business and how quickly one expects it to grow. Public companies hire CFO to manage the company’s finances; there are chances that smaller companies may find it more useful to hire an external accountant and keep them on a part-time basis to keep the accounts and invoicing up-to-date. The companies accounting can be handled simply by the HR staff or an in-house accountant.

For all of those who are simply starting, they are usually the people handing out the accounting. It is a good thing because entrepreneurs need to grasp the business finances, especially during the early days. Having good accounting software does make the job a lot easier.

4. The importance of accountability

While accounting may allow a person to do all of these great things, it is also considered supremely valuable if taken in a defensive sense. When you do accounting in the right way, the exposure to risks such as fraud minimizes significantly.

5. Ways to handle any small business accounting

There is no single right approach to deal with small business accounting. However, the fact that remains that the more of the process one can oversee and understand, the more is the information that accurately reflects what is going on in the business. One can farm out their data entry to a bookkeeper. Still, that bookkeeper may unlikely know the purpose of every item on every receipt to categorize it to be useful and meaningful. However, if one uses a bookkeeper, they need to learn to understand and read the financial statements they receive to make smart decisions. These decisions are taken on the information that they contain. Taxes on gross revenue or state excise taxes tend to be relatively easier in preparing. One needs to be able to complete all of these forms by themselves. 

However, federal tax reporting is much complex, and it is usually considered a good idea to hire an accountant to do it for you. It does not matter even if you have somebody else to do all of the business accounting one need to make sure to save all of their records and receipts regarding all of their transactions.

To conclude, we should know how important the accountant is or why it is important for every business size. Maintenance of accounts is also known to have several benefits as well.

By reading the importance of accounting, you can also understand “why to choose a finance career."

Accounting Finance Bookkeeping Business

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