The Importance of Accounting

What is the importance of accounting? All businesses should have a basic accounting process because it is how business owners will be able to evaluate financial performance. Specifically, proper accounting provided important information about costs and earnings and profit and loss. Without this information, decision making and planning in a business would be impossible.

What is the Accounting Process?

Accounting involves the recording and processing of all financial transactions from start to finish. This can be broken down into the following steps:

• Transactions – this includes purchases, asset acquisition, revenue, debt payoff or expenses
• Journal Entries – the recording of all transactions into the company’s journal, known as debits and credits.
• Posting to General Ledger – summary of all transactions in their respective accounts.
• Trial Balance – the total balance of accounts at the end of the accounting period, could be quarterly, monthly or yearly accounting. If there is a mismatch of debits and credits on the trial balance, errors and adjustments must be recorded on a Worksheet.
• Adjusting Entries – posted to accounts for accruals and deferrals
• Financial Statements – includes balance sheet, income statement and statement of cash flow

A Proper Accounting Process is Crucial for Small Business

Small businesses tend to have a limited budget, as a result, improper management of its finances can lead to failure. The knowledge of a company’s financial status promotes growth and development. This is why accounting is important. A good accounting process provides valuable insights on various aspects of the business’ finances, such as:

• Cash Flow – knowing how much cash on hand your business helps prevent running dry.
• Fixed Costs – consists of rent, bills, employee salaries, repayments, etc.
• Variable Costs – consists of raw materials, piece-rate labor, production supplies, commissions, delivery costs, credit card fees, etc.
• Financial health – the well-being of your business

These insights are more than just a summary of your company’s financial status, they can help detect and prevent fraud, withstand an audit and be approved for a loan.

The Importance of Accounting

After highlighting what the accounting process involves and what information a proper process can give business owners, we have to discuss what its purpose is. The importance of accounting can be broken down into several reasons:

• Comprehensive Record-Keeping: Maintaining an accurate account of a business’s financial transactions.
• Budgeting and Planning: Allows business owners to anticipate future needs, allocate resources effectively, and strategically plan for upcoming challenges.
• Decision Support: Facilitating informed decision-making across various realms, including pricing strategies, financial arrangements, and identifying opportunities.
• Real-Time Business Performance: Utilizing financial reports to gain real-time insights into the business’s performance.
• Financial Position: Understanding crucial aspects such as invested capital, cash flow, profit and loss, as well as assets and liabilities.
• Liquidity Assessment: Highlighting a business’s liquidity by evaluating available cash on hand and other liquid resources.
• Enhanced Financing Options: Making financing more accessible, such as loan applications and securing investments.
• Internal Control: Implementing measures to safeguard business assets, mitigate risks of theft, fraud, errors, and other potential losses.
• Legal Compliance: Fulfilling legal obligations by maintaining accurate financial records that can be shared with shareholders, tax authorities, and regulators.

Hiring an Accountant

As a small business owner, it may be tempting to take on the responsibility of your business’ financial data, usually to reduce costs. However, it’s always best to have a professional managing the day-to-day accounting process. The more your business grows, the more data collection will be required that needs to be organized. An accountant will not only record this data, but analyze it and provide important insights you’ll need to make decisions and plan ahead.

An accountant can also serve as a financial advisor to help you with budgeting and cash flow management. Lastly, when it comes time to prepare your business’ taxes, an accountant will help you identify money saving opportunities, deductions and reduce your risk of an audit.