The importance of accounting to modern day business cannot be overemphasized. In this post we would be analyzing just how important a good accounting record is to an organization. Later on, we would take a look at the functions of accounting. Before delving into the topic for today, let’s first discuss what accounting is.
What is Accounting?
Accounting can be defined as the process of collecting, recording, presenting, analyzing and interpreting financial information for the users of financial statements. From the above definition, we see that book keeping is infused in accounting. Book keeping is the process of correctly recording in account books transactions in money form so as to enable the proprietors and other interested parties ascertain its financial position at any point in time. It is safe to say that bookkeeping is the starting point of Accounting, but accounting goes further to measure records, analyze the statements and interpret financial results of business using accounting ratios and communicating these results to management and other users of accounting information.
The following are some of the importance of accounting to businesses:
- 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.
- Accounting helps to maintain proper records and accounts which can be used in the future to serve as evidence if there are legal proceedings against the company.
- If helps to across the financial performance and position of an organization.
- It helps both current and potential investors evaluate the growth and profitability of the organization.
- It helps to project the future of the business and also assist in carving out the financial plan for the business.
- It helps the business make critical decisions such as pricing decisions, product mix decision, shutdown or liquidation decisions and merger or acquisition decisions.
- Accounting helps to measure return on investment and compare this with what happens in similar and different businesses within and outside the industry.
Functions of Accounting
Functions of accounting are also referred to as the purpose of objectives of accounting. Functions of accounting include:
- Accounting ensures the accurate recording and presentation of financial information to help in the decision making process.
- Accounting ensures accountability and integrity
- Through common size statements, a company can compare its financial performance with its competitors.
- Accounting information can be used to measure the financial strength of related and unrelated entities.
- It presents information which enables managers render records of stewardship to the owners of the business (i.e Shareholders).
- 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.
- Accounting aids in planning. With accounting, you can draw up both financial and operational plans, then measure actual results, compare the plan with the actual results, measure the differences between the actual results and the plan, and find reasons for the differences.
- Accounting gives the government and its various agencies a clear view of the organization’s financial dealings. This helps the government accurately ascertain tax due to the organization, and also access the financial strength and performance of the organization in case the government needs to initiate a bail out.
Joel Lerner., Raul Gokam., Schaum’s outline of Book keeping and Accounting