Why is Accounting Important?

Accounting is essential for businesses because it helps the owners, investors, managers, and stakeholders keep track of the income, cash flow, assets, and liabilities of the company. 

Accounting is essential for businesses because it helps the owners, investors, managers, and stakeholders keep track of the income, cash flow, assets, and liabilities of the company. 

This is highly beneficial as it gives vital information about the financial performance of the business to help them arrive at more informed decisions. If you are wondering why accounting is important in business, there are many important areas to consider.

Owning a small business isn’t a walk in the park. Most small businesses are understaffed and underfunded, which means owners may have to attend to several aspects of the business at any given time. 

With many things going on, keeping on track, especially when it comes to accounting, can become challenging. Such delays can have drastic consequences for the business. But, before we dive into why accounting is important, let’s first cover the basics – what is accounting for? 

What Is the Purpose of Accounting?

The general purpose of accounting is to collect and report financial information about a business’s cash flow, financial position, and performance. Business owners, investors, and other stakeholders use this information to reach sound decisions about how to manage the business or whether to invest in expanding operations. 

The information is accumulated and recorded through standardized business transactions such as customer invoicing and journal entries. After storing the financial information in the accounting records, they are compiled into financial statements, which include the following significant documents:

Income Statement

This financial statement presents the company’s income and expenditures over a stated period of time. This document shows the amount of generated revenue and incurred expenses. 

The income statement helps the company understand whether or not it is making a profit, showing the business’s overall financial health. This is a vital part of an organization’s financial statements, alongside the balance sheet and cash flow statement.

Balance Sheet

A balance sheet presents the capital, assets, and liabilities of a business over a stated period of time, laying out the ending balances of income and expenditure as of the date stated on the report. With this, it gives a picture of what the company owns and owes. 

The document is typically used in conducting any financial analysis of the performance of the business. 

Statement of Cash Flows

Another vital part of the financial statements is the cash flow statement, which lays out the amount of cash flowing into and out of the company. It focuses on the activities creating and utilizing cash, which include investments, financing, and operations. 

Smaller businesses may not release a cash flow statement for internal use and only prefer to issue an income statement and balance sheet. But if they need to increase their capital through loan applications, this document is required by lenders, creditors, and investors as part of the business’s financial statements.

Statement of Retained Earnings

The statement of retained earnings outlines the changes in the retained earnings for a business during a reporting period. It is also known as the owner’s equity statement and is beneficial for understanding how the business utilizes the business profits that it generates. 

On top of these documents, the accountant may produce additional reports for specific purposes, such as determining the revenues from a particular sales region or the profit on a discounted product. 

Overall, the primary purpose of accounting focuses on gathering and reporting the financial information of a particular business. These financial records are the pillar of the business’ accounting system. As much as possible, business owners must have access to the records and review them regularly.

Why Is Accounting Important?

Accounting is essential when running a business because it gives business owners, managers, and investors quantitative financial information to make more informed business decisions. These financial documents must be updated and accurate if you want your business to stay afloat. Otherwise, it can result in failure, which is often attributed to poor financial management.

Poor financial management is the top reason why small businesses fail, especially during their early years. Since companies have limited resources during this period, accounting is crucial in providing financial information to grow and develop the business. If the business is without proper accounting, it is doomed to fail.

Here are some of the reasons why accounting is important for your business, be it big or small.

Accounting Keeps a Business Organized

If you ask why is accounting important, it’s because, without it, you won’t be able to:

  • Determine your business earnings.
  • Remember how much money you shelled out for various expenses
  • Compare your profits and losses to the previous quarters
  • Know your outstanding balances
  • Identify the amount of receivables you are owed

In short, accounting helps you determine how your business is performing. It keeps the workflows organized in a standard format to enable effective comparison with previous time periods and business operations.

Every Industry Needs an Accounting System

Accounting has existed as long as money has existed. There was evidence of old accounting systems found in ancient Egypt and Babylon. Even the Roman Empire produced very detailed financial records. 

Accounting started to modernize as a profession starting in the early 19th century. Nowadays, there are accountants and bookkeepers in every industry and organization, be it profit or nonprofit. Companies need to handle taxes and financial records properly, so they must have an effective accounting system.

Accounting Backs Up Your Tax Return Claims

All business owners need to file annual income tax returns, but many are scared to do this, especially if they don’t know where to start. This is where accounting comes in handy.

The very first step of filing an annual income tax return is collecting your business’ financial records. If you don’t have these records, such as your financial statements, you won’t be able to give the correct numbers on the return. 

The second step of filing is the dreaded auditing. If you were audited, you should be able to back up your return by presenting the vital accounting records to prove that you did your due diligence.

Accounting Helps in Evaluating the Business’ Performance

Your business’ accounting records reflect the results of your operations and financial position. Accounting is essential because it helps you understand how your business is performing financially. 

Not only does having clean and updated records help you monitor your expenses, profit, and debt, but it also helps you compare the current records with your previous records. As a result, you’d be able to allocate your budget in the future in the best way possible.

Accounting Makes You Accountable

If your business has shareholders, you know how critical it is to show results instead of just making promises. This is where accounting comes in. 

You are accountable for the growth and success of your business. Your stakeholders can see through your financial records how your business is performing, whether it’s growing or not. 

Aside from that, accounting helps you hold your subordinates accountable. Just make sure you are constantly updated with things such as performing trial balances and reconciling bank statements. This way, you can see any fraudulent activity before it takes a toll on your small business. 

Accounting Helps You Stay Within the Law

If you have a good accounting system and smooth processes, you keep your business in good standing. Handling financial matters of an organization is one of the many duties of an accountant. 

Not only that, they need to make sure they are in line with various laws and regulations. These records should always be accurate, organized, and accessible because business reviews can be conducted at any time. If your business doesn’t have a good reporting system, you may run into serious issues.

Accounting Facilitates Better Decision-making 

Accounting is essential for internal use inside the organization. Internal users are those who plan, run, and organize the company. Thus, management needs good accounting to arrive at important and correct business decisions, such as improving operational efficiency and pursuing geographical expansion.

Several factors are needed to answer these questions, and you have to look at the business’s financial records. Additionally, accounting helps internal users make decisions to avoid the following common business mistakes:

  • Not having a growth plan
  • Overspending
  • Underspending
  • Setting unrealistic goals
  • Plateauing
  • Ignoring competition
  • Not doing market research

Accounting Helps Create Budgets and Future Projections

Creating a budget plan and future projections can either make or break your business, and your accounting records always play a critical role in this. 

The budget plan and future projection let you strategize for the next fiscal year. This can be done by utilizing your previous financial records. Financial analysis provides you with a reliable starting point, so you can use the previous data as a blueprint to make your company more profitable. 

Financial Statements Are Required to Raise Capital

Of course, if you are trying to raise capital, it won’t be given to you right away. Investors, creditors, and lenders need more information about you, especially your credibility, before they decide to lend you money. One way is they poke and prod into your accounting books. 

Typically, you have to show potential investors the financial records of your business so they can identify information about your business’ profitability.

If you don’t have organized and well-structured accounting books, financial forecasts, financial statements, and profitability claims, it is unlikely that you will get any backing. As a result, getting a loan from a bank or a financial institution becomes impossible. 

Potential investors, lenders, or bankers are more likely to invest in a business if they sense that the owner has a firm grasp of their finances – someone who understands the different financial implications.

Accountants Know How to Deal With Complex Taxes and Finances

Have you ever wondered why some people’s taxes or some businesses’ taxes are more complicated than others? 

Well, if you’re a business owner with many income streams, your taxes can be tricky. With this, you can benefit from an accounting system by a professional – an accountant. 

An accountant helps you manage your business finances, thus making your life easier. Do you know that giving a substantial financial gift can make your taxes more complicated, too? Well, only an accountant can assist you with the ins and outs of complying with relevant tax laws.

Good Accounting Helps You Get More Deductions

Tax season can be a pain, especially if you don’t know what you can deduct. Well, a good accounting system that tracks your finances all year round can make the whole process seamless. 

An accountant also helps you by pointing out some deductibles that you might not know about, which can be helpful for you and your business. 

Why is accounting important, you may ask? Whether you’re a business owner or an employee, the way to grow your business is by reviewing your accounting records from time to time and establishing a detailed financial statement that allows you to identify some inefficiencies in your operations. 

Collecting these small savings on several expenses can benefit your business over the long run.

How Can an Accountant Help?

When your car breaks down, most people wouldn’t repair their cars at home. Instead, they take their car to a mechanic who knows exactly what to do to identify the issues and keep things running smoothly. Just like cars, small businesses need the same attention and expertise from a professional. 

Accountants file taxes, create financial assessments, and prepare forecasts throughout the year to keep your business running smoothly. They assist businesses in making wise decisions while considering compliance requirements.

Here are some of the reasons why you need an accountant for your small business:

Get All Your Deductions

Many business owners are thinking of ways to maximize their deductions during the busy tax season. They can only do this with the help of an accountant who knows how to spot where these potential deductions can come from. 

Accountants can advise business owners to come up with strategies for year-end deductions. Many business owners forget to account for things such as home office space, out of the pocket expenses, and depreciation. Accountants help business owners not to leave money on the table.

Avoid an Audit

Avoiding an audit is another compelling reason why hiring an accountant is essential. However, many believe that the only time an accountant could be helpful is when the issues have already occurred. 

Remember that an audit can be avoided if you already have the counsel and guidance of an accountant throughout the year. There are many reasons why a business gets audited, from being too charitable to having many mistakes on tax forms to excessive write-offs. 

Of course, an audit can simply take place at random as well. If you have a professional who takes care of these things, your business is fiscally sound all year round and a potential audit is not a concern.

Deal With Government Paperwork

An accountant also gives assistance when your company needs to deal with the government. A good accountant can do the following:

  • Complete, process, and file the necessary documents for business compliance
  • Update the company with the latest tax laws to help reduce errors when it comes to filing taxes
  • Prepare annual financial reports
  • Regularly update the company’s status in the company register of the government
  • Provide up-to-date bookkeeping information for making managerial decisions
  • Handle payroll and ensures that tax codes and payments are appropriately taken into account
  • Keep records of administrative personnel and directors
  • Organize allocation of shares/stocks

Preparing these documents accurately helps you save money – probably more than what the accountant charges your company. With their knowledge and expertise, you can save money, free up some cash flow, and raise capital for future expansion.

Apply for Business Loans

If you are applying for business loans from banks, they’d like to know if they can get their money back. 

Since the credit crunch in 2008, it has been extremely difficult for small business owners to borrow due to fear of bankruptcy and default. This only means that as a small business owner, you must have a good business case if you wish to apply for a loan. 

If you don’t know how to do it, an accountant can help you increase your chances. The fact that you hired an accountant might already sway the lender in your favor because it implies that you are serious about your business. 

Through effective accounting software, the accountant can show you numbers to back up your funding application. They can also answer some queries about expenses and revenue projections. 

Additionally, your accountant can advise which loan is suitable for you and whether the terms, conditions, and interest rates are favorable to you. 

Along with getting an accountant, business owners can benefit from using good online accounting software. It syncs with the banks’ accounting system, helping you understand what your real-time cash position is. 

You can also use it to view accounting reports, create expense claims, and send invoices on the go. 

Wrapping Up

Now, you learn what accounting is for and why accounting is important for every business. If accounting has never been your strong suit, as a business owner, getting the services of a professional is probably one of the best decisions you can make for your business.

Remember that a primary factor in growing your business is regularly compiling and reviewing your financial documents to spot potential inefficiencies and deviances in your operations. 

While it may be tempting for you to handle the business finances yourself to save costs, financial matters aren’t straightforward all the time. Dealing with these important areas of your business requires the proper knowledge and skills. 

Professional accountants can help you make intelligent business decisions and ensure that your business complies with all legal requirements.

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