why accounting essay

why accounting essay

The Importance of Accounting in Business

1. Introduction

There are several external organizations that require financial data to evaluate the performance of a firm. Investors and potential investors require financial information. Investors may hold a firm’s securities or be considering purchasing them. Financial analysts and investment advisers provide assistance to investors in making decisions regarding asset purchase and sale. Financial analysts are employed by investment firms to help provide investment research summaries, often offering buy, hold, and sell ratings of indecisive value in assessing the investment opportunity for their clients. Further in the financial markets, higher-quality information assists in the matching of financial supply and demand in reference to shareholders seeking investment opportunities. Only when accurately disclosed information, rather than incorrect or omitted data, promotes wise investment decisions will companies be able to secure the resources they need on terms that reflect the underlying economic value of their productive activities (e.g., liabilities and/or equity to assets ratio, companies’ operating performance, and investing and financing activities that are essential determinants in firms’ strategic financial statements).

Accounting plays a significant role in the effective management of any business. This is because it serves both the individuals who are external to the firm, such as tax authorities, financial analysts, labor unions, creditors, and financial and investment advisers; and those who are internal to it, such as the top management, managers, administrators, employees, and the workforce. The importance of accounting presents itself in different aspects of the firm’s life. It is crucial in today’s business. Accounting information serves two principal purposes for management control, decision-making, planning, and organizational performance assessment activities to be efficient, meaningful, and feasible. First, the information must be presented in a manner that the decision maker can efficiently and effectively utilize. Second, the information must effectively communicate the trade-offs regarding the decision choice(s).

2. Role of Accounting in Business Decision Making

Businesses have set objectives which encompass forming a business vision, determining business missions or goals, setting business characteristics, and objectives of the business. In this respect, decision making arises. As decision-making involves making a choice from among the many available alternatives, which alternative is more rewarding and how rewards should be utilized must be chosen. Thus, as basic resources and basic decision capabilities have to do with money, business decision making involves the planning and control of financial resources. This planning, coordinating, and control of financial activities or decision-making all require accounting. So financial planning results in good performance, but it is not the result of it because the decision resulting from financial plan, coordination, and control is called business decision-making.

Business decision making and accounting function are synonymous. In the business environment, business decision making, planning, and control are major functions of management. This is because all business activities, which are forecasted, planned, implemented, and controlled, require the systematic recording, classifying, summarizing, interpreting, and communicating of financial information. Accounting provides the aid for these processes. Since all business activities hinge on accounting, business decision-making takes care of the information generated by accounting. In business organizations, it is difficult for any business decision to be taken without the usefulness of accounting mentioned above. For any business decision, it is mandatory to look back at accounting with the information to facilitate such a decision.

3. Benefits of Proper Accounting Practices

There are a number of benefits that come from establishing proper accounting practices. Two vital advantages include the ability to understand financial statements, including the financial position and performance of a business, and the ability to meet requirements. Next are the advantages from better compliance, more efficient tax planning, and overall improved business decision making. It is also important to not underestimate the value of saving time, money, and averting potential financial problems, including fraud, thanks to a company’s proper accounting practices. Early detection of any financial problems is not only good for the business, but can heighten a company’s image and the desirability to investors.

Being able to accurately report on the health of a business is critical for business owners for a number of reasons. It can help point out key areas where the company should grow, things it needs to focus on, as well as how to best prepare for changes or financial downturns. Reliable bookkeeping and accurate financial statements can help business owners understand and develop the “big picture.” It can help shape financial decisions, which can become the difference between the success or failure of the business. When proper accounting practices are not in place, the risk of making costly mistakes is greatly increased. Risk management measures to protect your business from fraud and theft will also be easier to establish when you have trusted accounting practices safeguarding your company’s financial well-being.

4. Key Principles and Standards in Accounting

Some key points in the financial statements in their financial models, such as earnings for financial actions, warranty reserves, and leak losses. United States generally accepted accounting standards and those in the international financial reporting standards possess a significant degree of comparability for the financial statements of recognized ones such as the Translational Regulation of leases and benefit retirement plans. However, significant differences do exist concerning the year one estimation of the total expenses that emanate from warranty equipment and the major warranties framework itself is much less detail. This section elaborates several distinct concepts that fall under the broad category of liability guarantees and the related estimates, as allowed by both the United States and the international GAAP of companies, and when and to what degree an adjustment to previously issued financial statements is necessary. Understanding this insolvency accounting problem might help warrant acts accountants with some guidance as to the necessity and amount of the first instance incurred losses, as verified by the set of generally accepted accounting principles, when liability warranties are issued.

Accountants must follow a set of generally accepted accounting principles (GAAP) that are specific to each country. These principles were set by a regulatory board many years ago, and they flash significantly on the dollar amounts indicated as net income or earnings per share in the annual report filed by the majority of public corporations. Without understanding of company performance from the net income figure, expanded through such columns as financial position and liquidity, investors’ decisions could be skewed. The Securities and Exchange Commission also has significant influence on the PCAOB. Both the United States and international GAAP exclude any explicit guidance to the evaluation of the accrued losses that emanate from liability guarantees.

5. Conclusion

Accountants have been contributing greatly to protect the interests of the investors. Professional accounting in the banking sector is well recognized by the international accounting and trade laws. Both the banking sector and the accounting profession contribute significantly to the growth of an economy. Considering the importance of the banking sector to a country, the autonomy of these banks is curtailed significantly in order to avoid potential systemic risks that can create financial and economic disaster to a country. This is an appreciation of the fact that banks are different from other business enterprises. Levels of quality and quantity of financial frauds and economic frauds have been increasing at an alarming rate in recent years. The frauds pose serious challenges to the accounting professionals.

The business has always been an interest to business scholars. Discussions on the role of accounting in business are also not new. Accounting is an integral part of all businesses; irrespective of their nature, size and the tenure for which they have been in business. This role is ever more evident in today’s era of globalization when there is an increased transactions velocity. Accounting, one can say, is a language of business that communicates economically, or financially, or otherwise the achievements or failures of the business. Thus it becomes important to the businesses, academically. When companies adhere professional ethics and corporate governance on accounting and trade rules, such compliance delivers a remarkable value for investors in the long run.