Meaning, Objectives, and the Importance of Accounting

Accounting plays an essential role in a business. Proper financial reporting and statements play a vital role in decision-making, budgeting, and other administrative decisions. In the following segments, we will give a brief overview of the meaning, objectives, roles, and importance of accounting. 

Meaning of accounting 

According to the American Institute of Certified Public Accountants, accounting is referred to as "the art of classifying, recording, and summarizing it in a significant manner and terms of transactions, money,  and events, that are, in part at least, of a financial character and interpreting the result thereof." 

In layman's terms, accounting refers to the process of recording, summarizing, analyzing, and interpreting all of the financial transactions of a business. The financial statements and documents prepared at the accounting process end are reported for future decision-making, budgeting, and other reasons. 

There are several types of accounting- 

• Tax accounting- This accounting field focuses on complying with tax regulations and filing timely taxes and tax returns.  

• Forensic accounting- Forensic accounting involves the reconstruction of financial information when financial records are not fully available. 

• Public accounting- Public accounting refers to a form of accounting in which a firm of accountants performs accounting functions for businesses, government organizations, and individuals. 

Objectives of accounting 

Accounting helps fulfill the following company objectives- 

• Preparation of tax returns- One of the leading business objectives that accounting meets is to provide information for filing taxes at the end of the financial year. Businesses have to file taxes like income taxes, sales taxes, property taxes, excise duties, and tax on dividends. 

• Depicts financial position- By the process of accounting, accountants prepare financial statements and other documents that depict the business's financial position. Businesses can ascertain their profits and losses, their liabilities and assets, and how much debt they are through the accounting process.  

• Measures outcome of business operations- Accounting provides businesses with financial information to ascertain how smoothly their business is operating. Accounting helps businesses ascertain the financial impact of their operations. 

• Provides financial information to stakeholders- One of the objectives of accounting is to provide financial information to stakeholders. Stakeholders like investors, shareholders, and suppliers require financial information to see that their investment is being utilized efficiently and has high returns. 

Financial reports can also communicate with the business's existing and potential customers to foster trust and transparency. 

• Measures the efficiency of resources used- Through accounting, the management can measure how efficiently the resources within a business are utilized. They can analyze the performance of the employees with records and use that information to optimize their operations. 

• Determines profit and loss- With accounting, businesses get to determine whether their business could make any profits or losses that year. 

• Avoid frauds- Accounting reduces the risk of duplicate payments, late payments and helps avoid incidences of fraud. 

The importance of accounting 

• Recordkeeping- The importance of accounting is that accounting allows an organization to keep up-to-date financial records. Financial transactions are recorded, summarized, analyzed, and interpreted for decision-makers to make informed decisions. 

• Organizes financial transactions- To conform to the law of the land, all companies, businesses, and small businesses must follow legal and accounting guidelines. Therefore, accounting services are important because it organizes a company's financial transactions to maintain transparency and good business ethics. 

• Decision-making- Accounting is a way to ascertain and evaluate a business's growth and market position. Decision-makers use financial statements and reports to make informed decisions. Therefore, the importance of accounting is that it aids informed decision-making to achieve organizational objectives. 

• Helps with budgeting- Budgeting is an essential planning function. The business can plan its future expenditure, remove redundancies, and make other financial strategies with budgeting. For budgeting, decision-makers require detailed financial documents and statements. Therefore, the importance of accounting is that it helps the organization with budgeting. 

• Evaluate business’ performance- The importance of accounting is that it evaluates the business’ performance against past years’ performance and competitors. Financial statements act as a medical report of the business' financial and market standing. Accounting calculates whether the company is in debt, how much profit or loss is made, and how many liabilities and assets it has. 

• Banks and Lenders- The importance of accounting is that it aids in getting loans from banks, lenders, and other financial institutions. Financial institutions require well-organized and well-documented financial statements and documents to process a loan request. To apply for a loan, a company would have to disclose its assets, liabilities, profits, debts, expenses, and tax records with the financial institution. 

• Informs investors and other stakeholders- Accounting is important because it informs important financial information to the investors and other stakeholders, like suppliers, customers, and debtors. Well-organized financial documentation shows investors and stakeholders, growth, progress, and other market projections. Lack of proper financial documentation drives away any present and future investors. 

• Meets legal requirements- In many countries, businesses must maintain pension funds and employee provident funds on top of paying employee salaries. Not only that but they are also supposed to file timely taxes. One of outsourcing accounting is that it helps businesses meet legal requirements and operate within the jurisdiction of the law. 

The government or other law enforcement organizations can ask for your business’s financial documents at any given time. With accounting, companies can ensure that their financial records are organized and are accessible.  

• Aids future decision making- Not only does accounting help with budgeting and other decision-making, but it also aids future business projections. Therefore, the importance of accounting is that it provides decision-makers crucial financial information to make future projections. 

Accounting is a vital business function. No business can operate without proper accounting because accounting is the backbone of every business. We have learned from this article the objectives of a company that accounting helps fulfill and how important accounting is for a business.