Accounting plays an important role in the growth of every business. It serves as the backbone for any business. It generates understandable financial reports that are used by stakeholders and investors to understand the scenario of the company. Accounting generates reports that help in taking managerial-level decisions in the company.
What is Accounting?
As the name suggests, accounting is maintaining the accounts. This management of the company account is responsible for creating financial reports. These financial reports outline the performance in the market, profits generated, and cash flows.
It records all your transactions, cash flows, debts, liabilities, taxes, etc, and then creates a report about your financial data that is easily understood.
It tells you at what position your business is; whether you are making profit or loss, or what are your assets and liabilities, where is your cash flow. It gives you a detailed picture of the financial data of the company. This financial data further helps in taking the management-level decisions in the company.
Whether you are a small business or a large-cap business, it is important to maintain the accounting data. A small business may have one or two accountants according to their needs but big firms usually have a fully dedicated accounts department. The accounts department is responsible for maintaining the accounts and generating the understandable financial reports that are used by the shareholders and investors of a company.
These reports provide vital information like earnings and profit, cash flows, liabilities, and assets, which are used for further planning and decision-making in business.
A Financial Statement Accounting Report Generates Four important Statements-
- Income statement
- Balance sheet
- Cash flows
- Earnings statement
Purpose of Accounting –
- Maintaining record of transactions
- Helps in decision making
- Allocation of resources
- Analyzing performance
- Up-to-date control
- Legal requirements
- Liquidity
- Attracting investors
- Tax returns
- Future projections
Let’s discuss all the purposes that accounting serves in detail.
Managing Reports of Transactions-
Accounting helps in keeping the records of all the transactions made. This systematic record maintenance is of vital importance to any organization.
These records are used by business owners to review the performance by retrieving and comparing the old and new data. These records act as the support system for any business.
Helps in Decision Making-
The most important purpose accounting plays is in decision making. It provides detailed data to the internal management for carrying out important decisions regarding the business.
To run a business successfully and to flourish it further you need data, records, reports, and accurate analysis of all the information and that’s what accounting does for you.
It creates reports based on the facts and figures available which help management in taking important decisions like where to increase cash flow, buy new machinery or not, launching the new product in the market etcetera.
Allocation of Resources-
Resources are always limited and you have to put them to best use. Accounting helps in the allocation of resources. It helps you in making a budget and planning your resources carefully.
Detailed data about previous records and resources will help you in making the right budget and allocation of resources for the present scenario.
Analyzing Performance-
Growth is of vital importance to any organization. A fully structured financial report will help you in analyzing the performance of your organization. It will help you in identifying any pitfalls if there are any.
It will help you in comparing yourself with your previous performance. Hence will help you in creating different strategies required for further growth.
Up- to- Date Control-
A good accounting system will help you in keeping up-to-date control of the business ideas. It keeps detailed track of all the transactions that have taken place. Hence reducing the fear of fraud and errors. It safeguards the assets of the business and helps in avoiding losses.
Legal Requirements-
An accounting system in place will help you in carrying out all the legal requirements. It will make sure all the legal requirements are addressed properly. These financial records need to be shared with the authorized authorities from time to time. Also, they help in filing taxes.
Liquidity–
An accounting department will let you know about the liquidity of your business.
Liquidity is the cash that is used to pay off your financial commitments. An accounting system will help you in identifying any pitfalls and thereby taking timely decisions.
Attracting investors-
In order to retain and attract new investors, it is very important to keep up-to-date records of your financial data. Every investor would like to see the financial report on how your business is working and progressing.
In absence of financial records and data, investors will definitely move away. The same goes for applying for a loan as well. Assigning authorities will like to see your financial record.
Tax Returns-
Accounting reports will help you in filing taxes and will help you in finding out where you can save in taxes.
Future Projections-
Growth is vital for any business. It can make or break a business. Hence it is very important to set your goals. Make sure you set measurable goals like profit for next year, a scenario in the next five years.
For this, you need earlier data to set marginal and attainable goals. The financial records will help you in setting up realistic future projections for your business.
Conclusion-
How well your business is working you can tell by reading the financial reports. These financial reports are detailed structured reports on all financial aspects of the business. It includes information on your earnings to identify the loopholes where you have incurred losses and where you have made a profit. It also gives detailed insight on assets and liabilities, cash flows, and all other financial data related to your business.
Without accounting your business decisions will be shot in the dark. You don’t know where you are moving to. Accounting helps you show where your business stands in terms of finances. These reports aid in major decision-making for internal management as well as external management.
For internal management, helps in planning and controlling processes. It records financial transactions to communicate economic information. Exemplary financial management is the key to success for any business. Usually, businesses have limited resources hence it is of vital importance to have a good accounting system.