Businesses spend a great amount of time and money in recording their financial transactions. However, are these painstaking efforts finally worth it? Let’s explore what role accounting has to play in businesses.
Accounting is extremely important for recording the financial transactions in a business. Without accounting, you cannot display the financial health of your business to your stakeholders. Accounting is pivotal for various aspects and plays a crucial role in preparing the compiled financial statements.
What is Accounting?
A practice of systematic maintenance of records of financial records of the company, summarizing records to compile the financial statements of the organization.
Lenders and Banks: Lenders and banks have to consider the financial health of an organization, on the basis of which loans are granted, considering the revenue earning capacity of the organization. All this is impossible without the existence of a proper accounting system. Previous records of book profits recorded, taxes paid, assets and liabilities of the company are carefully studied before granting the desired amount to the management.
Information to the Investors: Accounts and financial statements represent the organization in front of stake holders, such as investors, creditors, debtors, government, customers, and employees. Accounts act as a representation to these stakeholders, who are directly impacted by the company’s financial position. For example, an investor would watch the company’s performance before investing in its shares.
Plan Your Budget: Budgets help businesses plan strategies, save money for expansion plans, and capital expenditure. It also sets warning signals in case the expenditure is exceeding unusually. Accounting will ensure maintenance of historical records which forms the basis of making and planning budgets.
Report Profits: Primary objective of any business is obviously to make profits. Statutory taxes such as income tax on profits are required to be paid mandatory by business. To ascertain the profit amount, accounting is a must.
Without accounting, your business will be like a ship without a radar, moving direction-less. Even in our day to day mundane activities we keep an account of our income and expenses. Small and big businesses alike maintain accounts to keep a tab on their financial position, which is the major motive of any business. Interested parties can make reliable decisions on the basis of accounts. Of course, management sometimes may engage themselves in dressing up of accounts that with an intention to defraud the stakeholders. That is the reason law stipulates compulsory auditing of accounts for businesses exceeding a certain turnover, which might differ as per the relevant terms and conditions of that particular nation.