The term accounting in Business is very common, especially during tax season.
But before we dive into the importance of accounting in business, let’s cover the basics – what is accounting?
Accounting refers to the systematic and detailed recording of financial transactions of a business. There are many types, from accounting for small businesses, government, forensic, and management accounting, to accounting for corporations.
Accounting is extremely important for recording the financial transactions in a business. Without accounting, you cannot display the financial health of your business to your stakeholders. Accounting is pivotal for various aspects and plays a crucial role in preparing the compiled financial statements.
Without accounting, your business will be like a ship without a radar, moving direction-less. Even in our day to day mundane activities we keep an account of our income and expenses. Small and big businesses alike maintain accounts to keep a tab on their financial position, which is the major motive of any business. Interested parties can make reliable decisions on the basis of accounts.
Accounting vs bookkeeping
Accounting and bookkeeping overlap in many ways. Some say bookkeeping is one aspect of accounting. But if you want to break them apart, you could say that bookkeeping is how you record and categorize your financial transactions, whereas accounting is putting that financial data to good use through analysis, strategy, and tax planning.
Why Is Accounting Important?
Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
There are three key financial statements generated by your records.
- The income statement provides you with information about the profit and loss
- The balance sheet gives you a clear picture on the financial position of your business on a particular date.
- The cash flow statement is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.
It is critical you keep your financial records clean and up to date if you want to keep your business afloat. Here are just a few of the reasons why it is important for your business, big or small!
Accounting in Business Helps in Evaluating the Performance of Business
Your financial records reflect the results of operations as well as the financial position of your small business or corporation. In other words, they help you understand what’s going on with your business financially. Not only will clean and up to date records help you keep track of expenses, gross margin, and possible debt, but it will help you compare your current data with the previous accounting records and allocate your budget appropriately.
Accounting in Business Ensures Statutory Compliance
Laws and regulations vary from state to state, but proper accounting systems and processes will help you ensure statutory compliance when it comes to your business.
The accounting function will ensure that liabilities such as sales tax, VAT, income tax, and pension funds, to name a few, are appropriately addressed.
Accounting in Business Helps to Create Budget and Future Projections
Budgeting and future projections can make or break a business, and your financial records will play a crucial role when it comes to it.
Business trends and projections are based on historical financial data to keep your operations profitable. This financial data is most appropriate when provided by well-structured accounting processes.
Accounting in Business Helps in Filing Financial Statements
Businesses are required to file their financial statements with the Registrar of Companies. Listed entities are required to file them with stock exchanges, as well as for direct and indirect tax filing purposes. Needless to say, accounting plays a critical role in all these scenarios.
The different types of accounting in Business
Every year, your company will generate financial statements that people outside of your company—people like investors, lenders, government agencies, auditors, potential buyers, etc.—can use to learn more about your company’s financial health.
Preparing the company’s annual financial statements this way is called financial accounting.
Managerial accounting is similar to financial accounting, with two important exceptions:
- The statements produced by managerial accounting are for internal use only.
- They’re generated much more frequently—often on a quarterly or monthly basis.
If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.
When your accountant provides you with recommendations for how to get the most out of your tax return, that’s tax accounting.
Tax accounting is regulated by the Internal Revenue Service (IRS), and the IRS legally requires that your tax accounting adhere to the Internal Revenue Code (IRC).
Tax accounting is all about making sure that you don’t pay more tax than you are legally required to by the IRS.
You’re doing cost accounting whenever you’re trying to figure out how to increase your margin, or deciding if raising prices is a good idea.
Cost accounting involves analyzing all of the costs associated with producing an output (whether it be a physical product or service) in order to make better decisions about pricing, spending and inventory.
Cost accounting feeds into managerial accounting, because managers use cost accounting reports to make better business decisions, and it also feeds into financial accounting, because costing data is often required when compiling a balance sheet.
Credit accounting involves analyzing all of a company’s unpaid bills and liabilities and making sure that a company’s cash isn’t constantly tied up in paying for them.
Credit accounting can be one of the most difficult kinds of accounting to do well, because it usually involves telling someone something they don’t want to hear (like your accountant telling you that you should be borrowing less.)