Introduction to Accounting and Its Importance
Accounting
is a way to organize the finances of a business so that its financial
transactions can be tracked accurately. Accounting is extremely significant to
every business. Therefore, every individual involved in a business is required
to have basic knowledge about accounting and its importance, which we have
elaborated below.
The topics
covered in this article are:
1.
What
is accounting?
2.
Importance
of Accounting
3.
Types
of Accounting
What is accounting?
Accounting is an organized and systematic way
of recording the financial transactions which are made by a business. It is a
process which summarizes, analyses, and reports the business transactions to
third parties like regulators, oversight agencies, and tax collectors.
Being a
one of the most important functions of a business, accounting is carried out by
a professional accountant or bookkeeper in small firms, and by financial
departments at bigger companies. Accounting generates various important reports
of cost accounting and managerial accounting which the management helps the
business management in making informed decisions.
Bookkeepers
may handle basic functions of accounting, but only qualified accountants who
are designated by the central authorities (Chartered Accountant, etc.) are
supposed to handle advanced accounting functions of a business.
Accounting
helps in creating financial statements of a company. Financial statements of a
business summarize its operations, cash flow, and financial position in the
market for a said period of time. They concisely summarize several financial
transactions which the business may have made and recorded in the particular time
period.This helps investors and other entities to analyze the financial
position of a business and make decisions accordingly.
While
preparing financial statements of a business, accountants usually follow the
Generally Accepted Accounting Principles (GAAP). GAAP is basically a set of
accounting principles or standards which follows the double-entry system of
accounting. It is used in identification of balance sheets, measuring
outstanding shares, and other issues of accounting.
Importance of Accounting
Accounting
mainly helps in recording transactions in an organized manner and creating
financial statements for a business. However, accurate and proper accounting
can pose as a defense mechanism of a business. Accurate accounting helps in
reducing the business exposure to fraudulent risks. If the accounting is done
right, then the audits conducted by the government will not create any hurdle
in the daily operations of the business.
Accounting
allows the business to grow in a measured and planned manner. It helps in
tracking the business assets, liabilities, expenses, and incomeso that the
business can make informed financial decisions. Decisions made on the basis of
present financial health and past performance of the business will help in
molding a more financially stable future. This will propel the growth of the
business and guide it to the path of attaining maximum profit.
Accounting
done wisely will help the business in attracting and satisfying its customers. It
helps the business to have knowledge of its financial position and understand
its sources of revenue and expenses. This gives a better understanding of the
business to the management and shows how the business can be grown while
maintaining customer satisfaction.
Lastly,
accounting informs the business what it owes and what it is owed. It helps in
tracking loanand interest repayments, managing payroll records, maintaining a
budget, attracting potential investors, and setting up accurate financial
records for payment of business taxes.
Types of Accounting
There are
three main categories of accounting: financial accounting, managerial
accounting, and cost accounting. They are elaborated as follows:
·
Financial Accounting: Financial accounting involves those
processes which are used by professional accountantsto generate the accounting
and financial statements of a business, annually. These
statements are then made public to be viewed by investors, creditors,
customers, and regulatory bodies.It aims at providing the financial information
of a business to its outsider parties. Financial accounting considers money to
be a measure of the economic performance of a business.
·
Managerial Accounting: Managerial or Management accounting
involves those processes which are used by professional accountants to generate
monthly and quarterly reports, which can be used by the management of the
business to make important business decisions. It aims at helping managers and
supervisors of the company in making financial decisions.
·
Cost Accounting: Cost accounting involves those
processes which take into account all the costs related to the manufacturing of
a product. The information produced by cost accounting further helps managers,
analysts, accountants, and business owners to do the costing of their products.
Cost accounting considers money to be an economic factor of production.
Author Details
Name :- Anil Tanwar
E mail id :- aniltanwar@mastersindia.co
Contact No. :- 9318353236
