Why is Accounting Important?

Why is Accounting Important? | Accounting Smarts
Charles Hall

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Charles Hall

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March 1, 2021

Accounting is important because it keeps you organized, it pays your bills, it keeps you honest and it builds trust with employees, shareholders and investors.

Regardless of the type of business you operate, one thing is certain, it needs accounting. From costing products and projects, to decision making, to filing taxes, accounting is the backbone of a company.

You might say accounting is important because it keeps you organized, it pays your bills, it keeps you honest and it builds trust with employees, shareholders, and investors.

There is so much more to accounting than these few snippets, so let’s explore what accounting really is and why it is so important.

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What is accounting?

“Accounting is the action or process of keeping financial records.”

It is the language of business. It is how a business tells their story and how it communicates performance and position. It takes raw financial data and produces usable information in the form balance sheets (financial position) and income statements (financial performance).

To be direct: accounting helps a business succeed.

9 Things that make accounting important

1. Record transactions

Accounting keeps you organized and allows you to focus on growing your business by tracking and recording every transaction of the business from sales, to purchases, to payroll.

Accounting implements systems, processes, and procedures that ensure all transactions are captured, recorded and protected so reports can be generated for future decisions.

It provides the system which allows you to forget the minutia so you can focus on the big picture.

2. Budget and planning

Accounting prepares budgets and projections to motivate future growth and decisions. It takes goals and attaches financial metrics that can be tracked and measured.

Accounting tracks and reports on the progress.

It holds you accountable to accomplish your objectives.

3. Keeps track of cash flow

Accounting monitors the inflows and outflows of cash. Cash is the life blood of a company and without it, bad things happen.

Accounting tracks accounts receivables to ensure customers are paying on time. Accounting tracks accounts payables to ensure the company is paying their bills on time.

And, accounting monitors the relationship of accounts receivable and accounts payable to ensure cash is available to meet payroll obligations as well.

4. Legal requirements

In jest we might say accounting keeps you out of jail.

It calculates and pays your taxes. Monitors legal contracts and ensures you comply with the terms and conditions.

It makes your debt payments.

5. Financial position and business performance

Accounting lets you know how the business is doing and where it stands at any point in time.

Accounting prepares a balance sheet to summarize all assets, liabilities and owners’ equity. It analyzes the balance sheet with ratios and comparisons to identify areas for improvement or areas of concern.

Accounting prepares an income statement to show revenues, expenses and the all-important profit or loss.

6. Financing, investing, selling

Financing is not always needed by all companies, but accounting ensures financial records are accurate and up to date so if financing or loans are needed, the bank has the information it needs to evaluate a loan.

Accounting actually generates trust for 3rd party financing, investing or selling of the business. No one will transact business with a company that has none, incomplete or questionable financial information.

7. Decision making

Business makes decisions every single day. Some decisions are based on gut feel, which can work from time to time. But the best decisions are based on data and information. Accounting provides the data necessary to make better decisions.

Accounting produces reports and schedules that summarize data in a way that decisions can be made. Accounts receivable aging helps to improve collections. Accounts payable aging helps to improve payments to vendors. Sales reports, expense reports, payroll reports all support decisions that need to be made.

8. Control and fraud protection

Accounting implements procedures and processes to ensure the efficient and timely tracking of transactions. It implements segregation of duties to reduce the potential for fraud or theft.

Accounting basically is the oversight for all the financial data and records of a company. If the records cannot be trusted it weakens relationships with employees, shareholders and investors. It limits the viability of a company.

9. Costing of products and projects

Accounting makes it possible to properly determine the cost of products, services and projects.

Anyone can sell things, but understanding the true cost of a product including the unit price and all associated costs of selling it is essential in order to determine the correct selling price that will yield a profit.

Understanding the costing process is essential. Understanding all costs is essential.

Different types of accounting

Like many fields of expertise, accounting has several different disciplines or areas of expertise. Not all accounting is the same. Each area will focus on a specific aspect of accounting. This is good as accounting covers so many facets.

Knowing your need will help you hire the right accountant with the right expertise.

1. Financial accounting

Financial accounting deals with all the aspects of public and private type companies. Accounting is based on generally accepted accounting principles (GAAP). Financial accountants are experts in GAAP. They understand the proper accounting and reporting of everyday business needs.

2. Managerial accounting

Managerial accounting deals with providing financial information to managers by measuring, analyzing and interpreting accounting data. This interpretation assists managers in achieving organizational goals and objectives.

3. Tax accounting

Tax accounting deals with all things tax. They take financial information, prepared by financial accountants, and prepare tax returns for both companies and individuals. They may also provide advice on tax strategies that conform to tax law, but help reduce tax liability such as cost segregation, depreciation and sales tax.

4. Cost accounting

Cost accounting is a valuable asset for any company. Cost accounting focuses on total costs of production. It looks at fixed costs, variable costs, and direct and indirect costs to truly understand the total cost of a product or process. With cost accounting you might hear terms such as standard cost, activity-based cost, throughput accounting or cost volume profit. Each of these is a cost accounting method.

5. Government accounting

Government accounting relates to the accounting of all financial transactions of a government entity both income and expenditure. The standards applied to government accounting are different from the GAAP standards of financial accounting. You find government accounting applied in all cities, counties, states and school districts.

Often accounting is overlooked in small business. The two main reasons being, the founder is an entrepreneur and is focused on one thing – sales. The second reason is the cost associated with hiring an inhouse accountant or an outside accountant.

While both of these reasons are understandable, hopefully this article has illustrated the critical need of accounting within all businesses big or small. Don’t think of an accountant as an added expense, think of an accountant as an income generator.

As they say, if you build it, they will come rings true when building an accounting team. Build it and they will help you succeed in more ways than one.

If you are in need of accounting assistance lets us help you with an accounting expert.

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall