Importance of Accounting in a Business
Accounting is the language of every business. Without it, it will cause chaos and a possibility of business failure. Just think what will happen to the world if we have no language- no communication, no understanding, no meaning. It’s a nightmare, right?
That’s why many small and large businesses invest time and money in their accounting- it’s a vital part of their lives. Here are the reasons why accounting is important in a business and why you should invest in it.
But first, What is Accounting?
It is the process of identifying, measuring and communicating economic information to provide financial decisions. It also involves recording, classifying, summarizing and interpreting financial transactions and events about economic entities in a significant manner. Accounting revolves from the recognition of accountable events, valuation of these events, journalizing them in a chronological order, posting them to the ledger, preparation of financial statements and analyzing financial statements. Learn more about the 9 steps of the Accounting Cycle here.
Usage of Accounting information
Accounting information is very important to business owners since it helps them how they will approach and manage their financials.
- Financial statements are very useful when it comes to making business decisions. You can determine the financial condition of your business. The working capital ratio also helps you determine whether your business will be able to meet its current obligations such as payroll.
- Income statements are also useful. It determines how profitable your business is for a certain period of time, whether it’s annual, quarterly or monthly. This is crucial because it also determines whether your business is performing well or not. These statements also show your income and profit, and also your expenses.
- Cash flow statements are also very important. It helps you get a clearer picture of where your cash is going. It provides the details of the inflows and outflows of your business’s cash for the year or for a certain period of time. It also helps you identify where the inflow cash originated and where the cash outflow is used.
- Other financial information such as a statement of changes in equity and the notes in financial statements are also important. This information helps its users understand the state and performance of a particular entity.
- Journals and ledgers meanwhile, gives you a more organized financial information that will help you make effective business decisions and financial strategies.
What will happen if accounting is not properly managed in a business?
Poorly managed accounting can result to fraud, scandals, and other illegal accounting practices. For some companies, these illegal practices go on for years without the owners realizing it. Some of the major companies in the United States have experienced a series of frauds and these are Enron, WorldCom, and Auditing firm Arthur Andersen. These accounting mishaps can lead to the downfall of your business and no owners want that. Hire a reputed CPA firm like Affluent CPA, Maryland.
“Accounting has been around for a very long time, and many people have been using it in their everyday lives. Many businesses nowadays are investing time and money for accounting management to avoid serious cases such as Fraud, and also to help them make effective business strategies thus an expected growth in their business.”