What is the Importance of Accounting? [With PDF]

The Importance of Accounting

The importance of accounting for any business enterprise is enormous. There is a need for accounting where financial transactions exist.

Economic transactions occur in both trading and non-trading concerns. Those organizations maintain the accounts to record these transactions correctly.

The importance of accounting in this company is, therefore, a fundamental fact. The importance of accounting is not limited only to corporate organizations but also to third parties relevant to trade and commerce.

In the light of multipurpose uses and utilities of accounting, its importance is as follows:

In Case of Trade and Commerce:

In particular, accounting has emerged for the recording of a company’s financial transactions. The importance of accounting in trade and commerce is significant.

The importance of accounting in trade and commerce is as follows:

1.Finding out the Profit and Loss:

The main objective of a business concern is earning a profit. Accounting helps to maintain accounts properly to know the business’s profit and loss during a specific period.

By preparing an income statement with a recorded transaction, it is possible to understand the profit and loss of a particular business concern for a specific period.

A businessman feels the need to determine the profit and loss of his concern because he can know whether or not his business concern runs effectively with its help. With its use, it is possible to measure the causes of the increase and decrease in profit or loss.

2. Exhibition of Financial Condition

Businesses want to know the financial position of a company with accounting after each year ends. Accounting can identify the actual economic situation on a specific date of a particular business concerns concern through the balance sheet.

At the end of the year, a balance sheet shows the number of assets and liabilities of a business concern. In a word, through a balance sheet, we can determine the financial position of a business concern by expressing its sources of funds and methods of application.

3. Comparative Analysis:

Business needs a comparative analysis of different data of a business concern to run the company successfully.

If the accounts are correctly maintained, it is possible to determine the financial position and trend of making a profit from the past and present accounts of a specific business concern.

4. Controlling Costs:

It is essential to maintain cost accounts to control product costs. In cost determination and cost control, the role of cost accounting is very significant.

5. Tax-Finding

The company determines the income tax based on the income of a company. For all business concerns, paying income tax is mandatory.

Accordingly, the business should prepare reliable income statements following the scientific method of recording transactions. The company can fix the income tax for a particular period.

6. Fixation of VAT:

The global VAT system has been introduced in many countries today. It is necessary to keep accounts of business concerns for a specific period to determine the amount of VAT to be paid.

7. Fraud and Forgery Prevention

If accounts are correctly maintained, It is possible to avoid fraud and forgery. Maintaining accounts positively affects the morality of staff, and this limits the trend of fraud and forgery.

8. The making of Decisions

Many people consider accounting to be a system of supplying information. Accounting provides precise information primarily about a business organization.

Management needs different types of information for planning and making decisions. Accounting gives them the necessary information for planning and decision making.

9. Cost over Control

The best way of developing a company is to minimize expenses under different heads. Through an accurate accounting system, a business person can be conscious of his company’s daily spending.

Accounting helps to identify the access expenditure in a specific head(s), which helps to take appropriate measures to control that expenditure.

10. Credit Taking

The company organization will take a loan from banks or other financial institutions on many occasions to run the company.

Institutions providing loans want to study a particular business concern’s financial statements to ensure the date of repayment before the loan is approved.

11. Business Management:

Accounting helps management to efficiently run the company in different ways by providing additional information.

Other Fields:

Accounting is not limited to business organizations alone but also to other institutions. Below are the different areas where accounting is required.

1.Importance to the Organization’s Owner:

The owner benefits most from keeping accounts. The owner can know the results and the company’s right and fair financial position for a specific period from the financial statements.

Through this, he can make a decision where necessary as regards expansion or business curtailment. If the return of the capital employed ratio is encouraged, the owner is inspired to invest further.

On the other hand, if the company loses years together, he can dissolve the company. Depending on the success or failure of the company, one can make a proper decision.

Besides, the owner may be aware of his business’s real property and assets, total debts, and liabilities with accounting.

2. Importance to the Population

people living in the community can benefit through the financial statements of trade and non-trading concerns.

With the growth of the company, the development and investment of a country grow. As a result, the employment opportunity increases, the price of commodities decreases, and the supply of commodities remain stable. By increasing people’s standard of living, helps social development.

3. Importance for Educational Institutions, Religious Institutions, Farms, etc.

Accounting helps schools, universities, hospitals, religious institutions, clubs, cooperative societies, agricultural firms, fish, poultry, and other social welfare organizations to correctly prepare their accounts.

The institutions and organizations’ members can quickly know the institution and organizations’ income-expenditure, promotion, and demotion.

4. Importance to Researchers

Accounting information is also essential for individuals involved in a country’s economic research.

They prepare reports during their course of study to interpret and analyze the financial statements based on which the business organization and the government benefit from the information required for planning.

5. Importance in the Development of Values

In social life, accounting plays a vital role in creating values. Accounting helps conscious individuals to make proper use of wealth and to form a moral character.

It allows people to be cost-effective and to repay the loan. In addition to accounting, the conscious individual helps to be self-confident and self-reliant.

6. Importance in the Creation of Accountability:

Accounting helps to apply a system of accountability and transparent accountability to people from all walks of life.

From the above discussion, we can clearly state that all people in society benefit more or less from properly maintained information and data available from accounting. As such, an undefinable fact is the importance of accounting.

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