Why Accounting is Important? by Essay Corp

Accounting is a very common term and we can hear it on a daily basis. In simple words, Accounting can be defined as a process of recording, summarizing, analyzing and recording of financial transactions of an enterprise. For any business enterprise, accounting is one of the most important functions and often referred as “Language of Business”. Accounting was originated at the time of ancient civilization and has evolved a lot since that.

Financial accounting and management accounting are some fields that comes under accounting and both forms part of business accounting. Statutory reporting comes under financial management whereas management accounting deals with reporting information for internal use by management.

Significance of Business Accounting

Business accounting helps the stakeholders in making number of short term and long term business decisions which helps in enterprise’s growth and penetration in the market. Three major statements are generated by Business accounting and they are as follows:

Profit & Loss Account– This gives the income statement which shows the total income generated/total loss incurred by an enterprise during a specific accounting period.
Balance Sheet or Statement of financial position– The financial position of an enterprise is reflected on a Balance sheet statement. In balance sheet, the information related to the closing balance of various assets and liabilities is added. Capital is the term used for the excess of assets over liabilities.
Cash Flow Statement– The Cash Flow Statement mainly shows that changes in balance sheet and income statement affect the cash and cash equivalents. It includes inflows and outflows of cash required for operating, investing and financial activities of an enterprise.

Financial statements are formed by combining all these three statements and this is required by all stakeholders.

Proper accounting is always important to overcome dynamic and complex business environment and keep all the records safe and up to date. Proper accounting helps in following ways:

In evaluating the performance of the business- Proper accounting gives an idea of the financial position via statements. These financial statements along with balance sheet and profit & loss accounts ratios gives an indication of the performance.
Manage and monitor the flow of the cash- Proper accounting system takes care of all the working capital and cash requirements of an enterprise.
Keep the business as statutory compliant- It reminds us about our liabilities dues that we need to pay such as VAT, sales tax and income tax. The timely payment helps an enterprise to be statutory complaint.
Creating budget and future projections- Accounting system also helps an enterprise to prepare its budget and project future trends based on past data.

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