Why Is Accounting Important? Plus 4 Types
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A business's financial health can have a major impact on the overall success of the company. Accounting for all the business's financial transactions and liabilities is crucial. Learning why accounting is important can help businesses determine whether they need more accounting resources to create a better financial management system for the company. In this article, we explain why accounting is important, define accounting, describe how it can impact a business and explore four types of accounting.
What is accounting?
Accounting is the practice of overseeing and managing a company's financial transactions and resources. This includes expenses, incomes, liabilities and any other financial resources a business might use for its daily operations. Accountants are professionals who perform these processes, preparing important documents, offering financial insight and filing taxes. The accounting practice is part of the business's core operational necessities, with many businesses either hiring an independent accountant or dedicating an entire team to accounting if the company is large.
Read more: Learning About Basic Accounting Concepts
Why is accounting important?
Accounting can be critical for a business for many reasons, including:
Filing and managing taxes
Accounting is important because businesses report their incomes to the federal government to help determine how much tax they might owe. An accounting team can help a business determine how much tax it owes, how to pay any owed taxes and can prevent negative actions on behalf of the IRS, like audits or penalties for improper taxation or filings. Accountants also keep proper tax records in case of an audit.
Tracking and managing transactions
The core purpose of accounting is to help a business track and manage all of its transactions, including expenses and incomes. Accountants also track things like outstanding invoices or payments and owed debts, so the business executives can better understand the company's overall financial position. Typically, the accounting team uses software that might integrate with other company programs to record daily transactions and expenses for more accurate data. Modern accounting software records transactions as they occur, reducing errors due to lag times between the transaction and its recording.
Budgeting and planning
Accounting is also important to create a budget and plan for a business' financial future. Businesses often create budgets to help manage expenses and pay off debts, limiting excessive spending to provide more liquidity for the company. A good accountant can show business executives exactly how much financial power the company has, which may dictate things like financing, expansion efforts and new product launches. Having someone on staff who understands these numbers and what they mean can be crucial for an executive team that isn't familiar with money management or financial discipline.
Making crucial business decisions
Often, crucial business decisions depend mostly on the financial health of the company. For example, if the company wants to launch a new brand in another country, having the financial resources or health to either acquire funding or outright fund the project typically dictates whether it succeeds. With an accountant on staff, business leaders can meet and discuss different financial actions and business decisions using the information and expertise of their accounting team. The accountant can provide a general overview of the company's financial standing or a more detailed look at specific assets, expenses and liquidity.
How does accounting impact a business?
Accounting can impact a business in several ways, including:
Improving financial health: Accounting can help a business improve its overall financial health by tracking and managing expenses and incomes and providing data to create more effective financial plans.
Increasing employee and customer confidence: A company with good accounting practices might feel more honest to customers and employees, which can help increase their confidence and potentially their loyalty to the business.
Safeguarding the company against financial liabilities: Good accounting practices can help safeguard a company against financial liabilities by creating a financial safety net, filing the appropriate taxes and creating better financial plans for potential sudden expenses.
Keeping better records: Accounting is also important because it helps a business keep accurate financial records, which can help safeguard the business against actions by the IRS and provide historical data to plan for the company's future.
4 types of accounting
There are many types of accounting, depending on the industry or sector. Here are four common examples:
1. Financial accounting
Financial accounting is a general accounting practice that focuses on tracking financial data to generate reports, like a balance sheet, income statement or statement of cash flow for a business. The accounting principles for this type of accounting follow the GAAP, or Generally Accepted Accounting Principles. These principles, set by the Financial Accounting Standards Board, provide standards for general accounting practices to ensure honesty, integrity and accuracy. Financial accounting is the most common accounting method among businesses of all sizes and also applies to individuals or non-profit organizations.
2. Management accounting
Management accounting is a practice that focuses more on providing crucial financial data for a company's management team to make high-level decisions. If a company is deciding on things like expansion, new products or new markets, management accounting provides data on the company's overall financial health and the availability of liquidity and other financial resources to support those decisions. Management accounting uses strategic management, performance management and risk management principles to provide an accurate, complete picture of the company's financial health.
3. Public accounting
Public accounting is a practice that focuses more on preparing businesses, organizations or individuals for tax filings, financing and other financial pursuits. These types of accountants help gather data and create or prepare financial statements, especially for oversight bodies, like the IRS. They often act as consultants for major financial decisions, comparing the organization or individual's financial health to the cost of the financial decision they plan to make.
4. Governmental accounting
Governmental accounting is a practice that focuses on managing governmental spending and incomes. All governmental accounting follows the standards and practices outlined by the Governmental Accounting Standards Board. Governments typically have vastly different financial liabilities and assets than a business or organization, so governmental accounting can require more expertise and experience in specific financial practices. Government accountants can help track public project costs, tax revenues for the government and other revenues that might affect the government's ability to meet its financial liabilities.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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