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

Jul 2019

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

Accounting

Accounting is considered as the language of business as it provides all the financial information at a single place. The most important decision regarding the future of a company can be made by the management using the information provided by the various accounting processes and reports. The better the accounting processes of the company are, the better the growth of the company is possible.

Types of Accounting

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

Managerial Accounting

Managerial accounting is also known by the name of management accounting or cost accounting. This type of accounting assists the management of a company by conducting processes like identification, interpretation, analysis of the various accounting information of the company. This type of accounting is more focused on providing correct and understandable information to the management of the company.

A managerial accountant will need to analyze many different events and interpret several metrics to reach a particular point. This point can be used by the administration of the company to take decisions which would affect the future of the company. Managerial accounts provide a very detailed analysis of the various operations of the company to both the management.

As most of the reports prepared by the management accountants are future-oriented, they consist of future estimations and possible trends in the industry in the future. Such statements can also be shared with the shareholders of the company.  

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 of the cases, the financial statements are made following the Generally Accepted Accounting Principles (GAAP), but these standards can be changed according to the convenience.

 As most of these reports are for the benefit of the investors and  shareholders, these reports are mostly based on past records. Seeing all the documents, an investor can see that he has made the correct decision in investing in the company or he needs to 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 because of which the accounting is considered as one of the essential functions to be followed by a company such as the following:

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 departments that are more profitable and will uplift the other department, which is not performing as well as expected. The preparation of a budget of the company will also reduce the wastage of resources and will ensure that all the resources are judiciously utilized.

Getting Loan

To get a loan from any bank, it is necessary that you present all the financial information of the company to the banks. This information will include the present financial picture of the company, 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 financial statements of the company, 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 organized 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, analyzed and finally, the information or report created is shared with the end user. After this process, all the documents are kept in order and an organized 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 which 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 are used to 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 primary objective of any company to make profits which will be shared with the shareholders of the company. The accounting function help to keep a record of the profits or losses made by the company so that the management can keep track and allocate the benefits to the betterment of the company and the shareholders properly.

Due to the reasons mentioned earlier, all the companies should hire the services of an accountant. If you are looking for a trustworthy and professional accounting firm in Dubai, then you should consider the services provided by JAXA. For any details do contact us, we would be happy to help.