You really can’t run a business without an accountant. Yet, few people really delve deep into this crucial aspect that every company has to deal with. Most business owners would rather run their business and organize the workforce than handle the minutiae of expense accounts or analyze their revenue to squeeze every percentage point out of the tax breaks.
For most people, accounting conveys boredom more than anything else. It’s crunching numbers that’s probably necessary, but few people are really interested in it.
So, let’s demystify the business of accounting a bit and explain why it’s so important.
What is accounting?
Accounting is a systematic and detailed analysis, processing, and communication of financial information. In this case, we’ll focus on business accounting rather than personal/family accounting.
It has sometimes been called the “language of business” as it measures the success of activities in the market. No business can survive without accounting and accountants, so it’s not surprising this industry is booming. What adds to it is the increasing complexity of tax codes, business regulations, and cross-border treaties. The latter is especially important for any company doing business internationally, but even companies who think they operate locally may be impacted by changes in the geopolitical climate.
For example, anything affecting the import of mineral fuels into Australia will affect industries that rely on it, and the accounting department will have to explain it and possibly propose a plan to ameliorate it.
Why is it important?
Let’s look at accounting in broad strokes, first.
Accounting plays a vital role in running a business because it tracks income and expenditures, ensures compliance with laws, and provides the business owners, investors, and the market at large with financial information to be used in making business decisions.
Income statements, balance sheets, and cash flow statements are key financial documents that are generated by a business’ records. The income statement provides information about a company’s profits and losses; the balance sheet forms a clear picture about how well a company is doing at any given time; finally, the cash flow statement bridges the two and reports income and expenditures for specific time periods.
While the principles of accounting are the same no matter where you are, there’s a lot to be said for regional nuance. A specialized accounting agency based in New York will be better able to navigate the local legal frameworks and provide the best service for US companies. The same can be said for professional accountants from Sydney and their ability to understand tax codes, statutory compliance, and regulations in NSW or Australia as a whole.
A good accountant can keep a business’ financial records spotless and up to date. That is essential for every business owner who wants to keep their company afloat.
So, let’s go into more detail about the importance and purpose of accounting.
What is the purpose of accounting?
One of the main objectives of accounting is recording transactions. Systematic, complete, and accurate financial transaction records are the backbone of the accounting system. They allow business owners to access and review transactions at any time.
Business decisions are made based on the above-mentioned records. Limited resources need to be allocated, expenses need to be prioritized, and the business as a whole needs to be directed towards its objectives. Prices or production volume may be changed depending on the market situation — budgeting, planning, and decision making all depend on accurate information provided by accounting.
Another purpose of accounting is to provide a clear image about a business’ performance and financial condition. Financial reports show key performance indicators (KPIs), the amount of capital invested, and available resources. Again, this information impacts decision making and the market’s reaction to the business’ current situation.
Specific functions of accounting
No matter the business’ size, all of the above-mentioned functions are important.
It evaluates businesses
Financial records show the financial position of a company and the results of its operations. To put it simply, they help business owners, investors, the public, and other businesses understand how a business is doing financially. Clean and up to date records help business owners and/or management keep track of expenses, debts, and gross margins. They also help when it comes to comparing current data with previous accounting information and making decisions about budget allocations.
It ensures compliance
Accounting systems and processes help ensure statutory compliance when it comes to businesses of all sizes.
Laws and regulations vary from country to country and even among states or other jurisdictions. The beforementioned accountants from Sydney and New York would have to spend time adjusting if they switched places. However, since basic principles are the same, they wouldn’t find the job too difficult.
The accounting department ensures that liabilities such as VAT, taxes, insurance, and pension funds are handled appropriately.
It helps in creating and budgeting projections for the future
These things can easily make or break a business, and financial records are incredibly important when it comes to making any kinds of plans.
Projections of business trends are based on historical financial data and are meant to keep business operations profitable. An accounting process can provide accurate data to base these decisions on.
It takes care of filing financial statements
Businesses must file their financial statements with appropriate regulatory bodies. Entities listed on stock exchanges are required to file them with exchanges they’re listed on and for the purposes of filing taxes. Naturally, an accounting department is essential for these tasks.
So, there you have it. A simple overview of accounting, what it does, and why it’s important. Now, depending on a business’ size, a company might be able to make do with a single accountant, but for those moving a large volume of goods or providing an expansive array of services, dedicated accounting departments (in-house or outsourced) are the way to go.