Accounting is a critical aspect of any business. It ensures that sound financial decisions are made for the success and smooth running of the business. Usually, it involves the preparation and consolidation of financial statements and accounting reports for easy evaluation by stakeholders of a business entity in order to foster transparency, accuracy, and reliability.
Types of Accounting
The accounting discipline is usually categorized into two:
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Managerial Accounting
Reports gathered from managerial accounting are used by managers to make strategic business decisions in order to improve overall business performance. It utilizes financial statements to make key business decisions.
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Financial Accounting
The main focus here is to determine business performance based on different criteria. These reports are the ones commonly used in company publications for shareholders to observe the progress. It applies widely used accounting principles and standards for easier understanding by stakeholders.
Why Is Accounting Important for a Business?
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Record Keeping
In general, several parties might have interests in the financial records of a business ranging from investors to employees. Keeping an organized record of financial statements allows anybody authorized to access those easily when necessary.
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Decision Making
Accurate information is necessary for appropriate decision-making. Accounting reports help managers make sound decisions in regard to hiring, business purchases, investments, and many other critical issues.
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Business Performance
Accounting reports provide a critical testament to business performance. It informs managers on whether the company is heading in the right direction, considering the past and present financial records alongside the rectification of any mistakes.
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Laws and Regulations
Laws can make or completely break a business. So, it is important that you always be sure to be in good standing and operate within the law. Governments may decide to check on your compliance with the law, and a lack of accurate accounting information may lead to business closure or hefty fines.
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Budgeting
Effective cost management is crucial for any business organization. The use of accountants or accounting software ensures that you easily identify the area that has exceeded its budgeted expense. Thus, you can formulate new strategies to cut down costs.
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Taxation
Handling the taxation of a business can prove to be quite tasking and a challenge to many. A robust accounting system by your accountant will help ease worries and ensure that you are in control of your money.
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Avoiding Fraudulent Activities
Effective and consistent tracking of transactions is necessary to avoid falling prey to fraudulent activities in your business. Good accounting systems ensure that excellent internal control is in place within the business such that fraud can easily be detected and prevented for business success.
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Funding
Business expansion may require additional funding from external sources such as banks. These institutions require recent financial statements of at least 3 years to track business performance and decide on what amount they can offer you. Without good accounting reports, you risk losing out on a funding opportunity that can be devastating for your business.
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Debts
Accounting helps inform you of the customers who are yet to pay up as they appear on the balance sheet as account receivables. This ensures that you do not go at a loss and effectively collect all money owed by the business.
Good accounting also highlights debts the business owes and ensures that they are paid timely. It also allows you to understand the condition of the credit standing alongside the plan for future payments.
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Investment
Investors are key to the growth of any business. Though you may be seeking to go solo, for now, it is important for you to hire an accounting manager or outsource accounting services if the need arises in the future. Because the investors need to see proof that your business is viable and profitable before investing their cash into your business.
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Liquidity
Accounting enhances business liquidity by ensuring effective cash management. Liquidity determines the business’s ability to meet immediate and short-term cash payment obligations. It is a ratio of company assets to company liabilities. Company liabilities must stand lower than company assets to avoid any chances of business bankruptcy.
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Inventory Management
Accounting helps to determine inventory turnover, which is the speed at which a business sells its product within a market. It is especially important for businesses dealing with perishable goods because any product that exceeds its shelf life while within the business is a loss.
Inventory turnover is usually reflective of poor sales, which the accountants use to determine whether production should be reduced or increased to avoid any unwarranted losses. This is to make sure that the business works within the safety margins.
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Planning
Finally, an accounting system can be effective in planning for your business’s future development and growth. You can evaluate the performance of your business for the past few years against some key factors. This will give you an overview of how well your business has been run so far. Then, it will be easy for you to develop proper plans on the amount of inventory to buy in different seasons to stay competitive within your industry.
