Six Important Uses Of Accounting In Business
Accounting is a significant branch of finance that allows businesses to stay updated with their financial status and performance. It is a systematic and detailed recording of all business transactions, including asset and lease valuation, taxes, debt-to-equity ratio, inventories, and revenue of a business.
Without accounting, businesses cannot make any financial decisions for their firm. Therefore, it is crucial for running any business. There are different types of accounting, such as accounting for small businesses, managerial accounting, and accounting for forensics, government, and corporations. It also helps ensure statutory compliance regarding following set standards and provides a baseline for investors and owners to make sound investment decisions and hire a tax accountant for their organisation.
Here Are Six Prime Uses Of Accounting In Business:
The importance of accounting makes it inevitable for any business to adopt it. Almost every business has a finance and accounting department because every organization needs it, whether big, small, or governmental.
Therefore, let us delve into some important uses of it.
1. Record-Keeping
One of the major reasons why businesses need a documented account of all transactions is that they need to keep records of their financial progress. Receipts alone are not enough and are only raw data of financial transactions. In contrast, accounting is a systematic record that accounts for everything with any financial valuation. It makes evaluation and assessment a lot easier.
So what is accountancy in a nutshell? It is the process of maintaining financial records. This includes the company’s financial statements, including balance sheet, profit, and loss statement (or income statement), cash flow statement, and statement of owner’s equity.
Businesses must present these records to potential investors and banks when getting investments and applying for credit. They also require these statements for statutory compliance and to meet accounting standards.
2. Budgeting
Budgeting is essential for the smooth running of a business. Setting a budget for different departments requires an assessment of their financial performance. You cannot set budgets that exceed your financial limitations. Therefore, you need to make realistic budgeting decisions.
For example, while setting the marketing budget, you must first set marketing objectives and a matching budget. Your goal must be to make more sales than the amount you invested.
The same goes for every other department and business function. It offers a baseline for all budgeting decisions. Otherwise, your business might suffer losses if you spend more than you can.
Alternatively, it helps decide which business function requires more budget than others. For example, suppose the business operations are suffering. In that case, you might need to allocate more by adjusting the budgets of other business functions. Therefore, you may need to set priorities when setting budgets.
3. Investment Decisions
Every business needs to grow to sustain itself and get ahead of the competition. For that, you would have to make expansion plans and future projections. You cannot make such decisions without the proper financial data that the company statements provide.
It provides the required information regarding running expenses, income, and profits. For example, as a new small business, it might take you years before you start earning profits. You may initially have to keep reinvesting to survive.
However, once your business stabilizes, you can make expansion and growth plans by looking at your financial statements. It acts as a basis for all investment decisions.
Similarly, as a large corporation, you need to look at your asset valuation and liquidity to determine the investment potential of the business. It also helps creditors assess the business’s creditworthiness before issuing credit as an investment.
4. Tax Assessment
Another significant use of accounting is to assess company taxes. Every business owner must pay different taxes, such as property, income, excise duty, customs, sales, etc. Your business accounting statements will show the tax rate and amounts and allows accountants to apply for tax filing and rebate.
Tax recording lets you see how much tax the business paid since they must disclose all tax information to tax officers for compliance. In addition, it helps eliminate the chances of tax fraud if you keep your books updated.
The primary purpose of tax accounting is to track the funds coming in and going out of the business. It applies to tax exemptions as well. You need to state the taxes even if they are zero. It helps when reporting your financial statements to compliance officers.
5. Improved Payment Cycles
Without sound accounting systems, it might be difficult to track several payments, installments, debt repayments, and other payment cycles. However, it helps keep track of the payables and receivables cycle.
Moreover, every payment, including tax payments, needs proper calculation for proper allocation. Only accounting can help you do that. Investors’ profit shares, wages, salaries, and lease payments need to process timely. The timings and amounts of every payment will vary. Only accounting can let you stay abreast with all such payments.
It becomes even more difficult to stay updated with all payments in a large corporation. The larger the operations, the more frequent payment cycles there will be. Accounting lets you stay on top of things.
6. Used to Determine Fair Price
The fair price of a business depends on the share price and volume trading in the stock market, which helps determine business valuation, combined with the asset valuation, reflecting a business’s fair selling price.
Only accounting statements can help accurately determine the fair selling price of a business if it wants to sell the business or part of its operations. Even if you do not plan to sell any part of the business, an accurate market price estimation helps determine business value in the market. You must work towards maintaining your business value via a strong financial performance by assessing financial health regularly.
Suppose your business value keeps dropping, even at a steady rate, as reflected in your financial statements. In that case, your business may be vulnerable to takeover. It is important to match the market valuation to stay afloat in the face of competition. Therefore, as soon as your statements depict declining business value, it would help if you took action accordingly.
Conclusion
Accounting is a core function of every business entity and serves multiple uses on many fronts. You need to record all your financial transactions for a bird’s eye view of the financial health and to track the business’s financial performance.
You cannot allocate a budget to different business elements without proper accounting procedures. You need to assess your financial limitations to optimize budgeting for all departments. It is also useful in making investment decisions. You can use your financial statements to see how much you need to reinvest in current operations and how much to invest in expansion and growth plans.
It is also useful for accurate tax assessment to track funds going in and out and for tax disclosure purposes. In addition, it helps streamline multiple payment cycles simultaneously. Different accounting software can set up automatic calculation and payment procedures.
Lastly, accounting helps determine business value in the market in the face of competition. It enables you to decide what to do to enhance business asset valuation and optimize share price to determine and maintain fair market price.
Such uses of accounting make it indispensable in any business or government entity.
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