Importance Of Accounting
Accounting has a vital role in monitoring the economic activities of businesses. It serves as an instrument to arrive at proper business decisions. Through accounting, any business is set in the right direction as it helps business owners, managers, and stakeholders understand the current financial position. And those are just a few of the many importance of Accounting.
What is Accounting?
The American Institute of Certified Public Accountant (AICPA) defines accounting as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction, and event, which in part at least of a financial character and interpreting results thereof.”
In simple terms, it aims to interpret the financial information a business has. This financial information is then used to create business decisions.
The objectives of accounting
The primary objectives of accounting in a business are the following:
- Keep a systematic record of financial activities.
- Determine the results of the business operations.
- Interpret the business’ current financial position.
- Aid in decision-making.
- Comply with the law regulations.
Who uses accounting information?
Here are the users of the accounting information:
- Business owners
- The organization
The Importance Of Accounting
Here are the several importance of accounting in every sector:
1. Accounting allows a business to plan its growth.
All businesses plan to expand their growth. An essential need to get started with planning is looking into the company’s financial records. The important question to ask in planning is, “what your profits should look like in one year/five years?”
A business can get a glimpse of how it is doing through the financial statements. Without accurate financial statements, you cannot plan something concrete in the future. It sheds light on how much on your sales, profits, margins, making it easier to justify your growth objectives. That’s why you need financial statements in planning a long-term business goal.
2. Accounting helps you secure a loan.
If you intend to place a loan for the expansion of your business, you’ll need updated financial statements to back you up. This is because lenders require borrowers to provide them the financial picture of the company. This way, they know the business can pay off the loan in time of the repayment.
The financial statements demonstrate where your business stands. It defines whether your business is doing well or going down the drain. Either way, lenders such as the Small Business Association (SBA) loan requires borrowers to provide three-year financial statements and a one-year cash flow projection. If you can’t provide such, you’ll have a hard time securing a loan.
3. Accounting finds you investors.
When seeking potential investors, you should be prepared with your accounting records. Investors want to see a clear picture of how profitable your business is, so it’s always required to provide them your financial statements. Treat it as your supporting document in persuading them to bet on your business.
4. Accounting helps you comply with tax regulations.
Taxes are complicated; you miss one figure, and your business might be in trouble with the IRS. Accounting helps you keep track of your tax information reporting obligations. It helps you arrive at an accurate financial record that minimizes your risk of breaking any tax regulation.
5. Accounting defines precisely how much tax you need to pay.
The IRS fines you when you underpay your taxes. This is why it is so crucial to have an auditor who can prepare this computation for you.
On the other hand, when you overpay your taxes, the IRS will return the extra together with the rest of your tax refunds. If you only computed your taxes correctly with your accountant’s help, you could have avoided this. This enormous tax refund could have been invested in other business initiatives.
6. Accounting guides you in your business decision-making.
For every business decision, your financial records will guide you towards the feasibility of your plans. Say you want to acquire additional equipment next year; you can see how feasible it is by merely looking into your accounting records.
By looking into your financial records, you can create more rational business decisions that involve finances. With accounting, you can avoid overspending, underspending, and plateauing.
7. Accounting provides hard numbers that outline great strategies.
Having reliable accounting gives you concrete figures. And these figures can be used in outlining new business strategies.
When taking risks, you have to analyze the possible results. And accounting helps you know if the strategy was effective. Before making the change, you have a record of the business expenditures and revenues. And after the change is implemented, you can gather the results and compare the numbers if the strategy was successful after all.
8. Accounting improves payment cycles.
The financial statements are essential in optimizing your cycles of accounts payable and receivables. In the business’s daily operations, there are continuous outgoing payments that include daily wages, investor profits, loans, and stocks to be supervised. These can’t be completed when numbers don’t add up. That’s why accounting is a part of the business operations—it assists with optimizing payment cycles.
Find out here how you can grow your business by developing the skills needed for bookkeeping.
Why you should consider hiring an accountant for your business
If you want your business to flourish without having to worry about any financial liabilities that you may not be aware of, you may consider hiring an accountant. Yes, it’s one more expense to shoulder, but it’s one that is worth all the cost.
Here are the several importance of accountant in your business:
1. It saves time.
When doing business, time is money. Since your business requires most of your time, getting an accountant to handle the financial aspects results in one less thing to worry about. Your accountant will do the work for you, allowing you to focus on things that need your attention.
Even more, accountants won’t forget all necessary tax deadlines, laws, rules, and regulations that you may miss in the long run. They are your lifesaver in meeting IRS business requirements. If you don’t know these all by yourself, it’ll take you time to be familiar—stripping off an adequate time that could’ve been spent on something you should focus more on.
2. It minimizes tax liability.
Accountants are aware of the most tax-efficient ways to operate the business. They could give you valuable advice that you may not get from anywhere but them. Accountants can save taxes and avail tax deductions by merely looking at the business’ financial capacity and financial transactions.
They will handle the necessary tax computations and advise you on operating the business in a more financially sound manner.
3. It avoids tax penalties and fines.
One of the most common importance of accountants in a business is they prevent you from getting hit with tax penalties and fines. Accountants keep abreast with the necessary deadlines for filing business taxes and more tax requirements. Missing to submit these paper works incur a hefty amount of penalties.
Having an accountant handle all these keeps you from getting fined. You won’t have to worry about all tax implications since you got someone to take care of it now.
4. It gains you a trusted advisor.
Accountants are very well aware of the know-how of handling finances both for personal and business. Having them alongside doing business helps you get familiar with the proper way of keeping these two separate.
The IRS doesn’t take kindly to entrepreneurs who mix the two. Failing to separate how you do business taxes and personal finances may result in questionable acts. This could lead to additional auditing to prove the legalities of every business transaction.
5. It frees you from all tax worries.
Doing taxes is a complicated business aspect. While it is required, you can live sans the worry of missing deadlines or reporting inaccurate numbers when you have an accountant. Having someone handle the complexities saves you from all the stress.
To name a few, some of the requirements you need to remember include company year-end accounts, abbreviated company accounts, personal tax returns, business tax computations and returns, VAT calculation, payroll, and more.
6. It helps cut down costs.
Accountants are innately vigilant. While you are occupied with other business aspects, they will be closely monitoring financial transactions to avoid excess costs. If you were to handle these on your own, you might not notice some questionable cash outflows.
When you have an accountant who can watch over your business transactions, you can ensure that every penny is going to the right place. You will avoid overpaying for resources.
7. It aids in business planning.
Accountants prepare financial reports that you will use as a basis in business planning. They are also there to advise you on projected inflows and outflows in the next accounting calendar. Thus, their presence is that valuable in a business setting.
There is a lot of help they could give you in terms of guiding the business. Every business needs the involvement of a financial expert. Accountants can help you plan and prepare financial details that potential investors or creditors will want to see.
8. It helps organize the business.
One remarkable importance of accountants in the business is their ability to keep things organized. They can assist in the financial transactions of multiple departments. They can assist in organizing rental and utility expenses, payroll systems, and budget-making. And more importantly, accountants can give powerful advice in securing worthy loans and investments that your business needs.
9. It contributes to business growth.
Hiring an accountant is one of the best investments in your business. Their guidance is an asset to the company as they know the ins and outs of a business. They will serve as your great source of wisdom and advice in growing your business.
You will work hand in hand with them to meet business success. They can walk you through the process of investing in the right resources, people, and partnerships. Thus, they contribute to the overall growth of your business.
These are the reasons explaining why you should consider getting an accountant. If your business’ financial capacity allows it, don’t hesitate to hire one. Their service is an investment that pays off in many amazing ways.
And those are the importance of accounting for every business across all sectors. If you want to get more accounting lessons, Skill Success offers several mastery classes to upskill you. Here are some online accounting classes you may check out:
- Basics of Accounting
- Accounting Fundamentals for Employers and Employees: Read, Understand, and Analyze Financial Statements
- Advanced Financial Accounting
Whether you’re looking to launch a career in finance and accounting or you’re hoping to discover some personal finance strategies, you’re in the right place. You can also learn how personal finance can be improved through online courses.