Why Accounting is Considered as the Life Blood of a Company
24

Jul 2019

Every decision of management has a significant impact on the future of the company. Still, the most critical decision, which can change the business's whole course, is taken after carefully considering and analysing the company's financial aspects and other reports. This is where accounting comes in.

Let us know more about the Accounting function and how can it help a business.

Accounting: Meaning

Accounting is considered the language of business as it provides all the financial information in a single place. The management uses the data uncovered in the accounting process to make decisions that will help guide the business to the path of growth and development. The quality of the Accounting Processes plays a significant role in the growth and development of the company. As the quality of the information available to the management after the accounting process increases, the chances of the business's growth also increase.

Types of Accounting

The accounting process can be divided into two types. Each type serves a specific purpose in accounting. The two types of accounting are, which are:

  1. Managerial Accounting

Managerial Accounting (also known as management accounting or cost accounting) is a type of accounting that assists the company's management by conducting processes like identification, interpretation, and analysis of the company's various accounting information. This type of accounting is more focused on providing correct and understandable information to the company's management on which it can act and make the decision for the future.

A managerial accountant will analyse numerous different events and interpret many metrics to reach a conclusion. The company's administration can use the result to make decisions that will guide the company for the future and help the company prepare for any unforeseen circumstances. Managerial accounts provide a very detailed analysis of the various operations of the company to both the management.

As most of the management accountants' reports are future-oriented, they consist of future estimations and likely industry trends. Such statements can also be shared with the company's shareholders to help them make an informed decision.  

  1. Financial Accounting

The financial accounting process by which the financial statements such as balance sheet, income statement, cash flow account etc., are prepared so that they can be shared with people outside the company. In most cases, the financial statements are made following the Generally Accepted Accounting Principles (GAAP), but these standards can be changed according to convenience.

 As most of these reports are for the benefit of the investors and shareholders, these reports are primarily based on records. Seeing all the documents, an investor can see that he has made the correct decision to invest in the company or take out all his investments from the company.

An accountant needs to combine both of these types of accounting while preparing financial reports of the company. Every function in accounting needs to be performed correctly, or else there may be consequences to be faced by the company in question.

Importance of Accounting

There are several reasons accounting is considered one of the essential functions to be performed by a company. Some of the Advantages of Accounting for a company are:

  • Planning Budget of the Company

Accountancy plays a vital part in planning as accounts are needed to prepare budgets for the company. Proper planning will allow the business to focus on the more profitable departments and will uplift the other department, which is not performing as well as expected. The preparation of a company budget will also reduce the wastage of resources and ensure that all the resources are judiciously utilised.

  • Getting Loan

To get a loan from any bank, you must present all the company's financial information to the banks. This information will include the company's current financial picture, the amount of loan required, the security that the company will be able to repay the loan, etc. After interpreting the financial reports, the financial institution will be able to decide whether to give credit to the company or not.  

  • Making Decision

The decisions taken by the management of the company are very crucial as they will concern the future of the company. Without referring to the company's financial statements, the administration will not be able to decide for the company and preparation of all the financial reports require proper accounting and bookkeeping functions.

  • Keeping Records

Keeping all the records in an organised manner is very important for a company as they may require any document at any given time. While performing the accounting function, all the records are collected, interpreted, analysed and finally, the information or report created is shared with the end-user. After this process, all the documents are kept in order and in an organised manner so that they are accessible at every point.

  • Controlling Cash Flow

The accounting will help the management take care of the working capital of the company. Taking care of the cash flow of the company is very important as it is the capital that is allocated for the day to day operations of the company. The accounting will ensure that the monetary resources are allocated wisely to all the departments of the company.

  • Transparency of Information

The financial statements, which are made at the end of the accounting processes, share the various financial information to the investors and shareholders. These financial statements are a significant reason for bringing in investors to the company.

  • Profit Reporting

The accounting function plays a significant role in reporting the profitability of the company. It is the company's primary objective to make profits that will be shared with the shareholders of the company. The accounting function helps keep a record of the profits or losses caused by the company so that the management can keep track and allocate the benefits to the company's betterment and the shareholders properly.

Due to the afore-mentioned, all the companies should hire the services of an accountant.

If you are looking for a trustworthy and professional accounting firm in Dubai, you should consider the services provided by Jaxa Chartered Accountants. For any details do contact us, we would be happy to help.