Why is Accounting an Important Function - Especially for Small Businesses
20

Jul 2020

The term Accounting will be known to all the businessmen and entrepreneurs. It is one of the most basic function which a business needs to perform. Accounting not only helps the day to day business activities but also assist in service which will be performed in the future. Every business needs to maintain its books of accounts as these books will be further used in various other functions such as Auditing, Payroll, Filing and Paying Taxes, etc.

If a business which has just been formed or a businessman is looking to start a business, then they must have an accountant. The management of any company needs to understand the numbers to understand the financial standing of the company and whether the company is moving towards the right goal. Accounting helps in actually understanding the present situation of a company so that the management can prepare future strategies for the company.

Let’s understand more about Accounting and how it can help businesses.

What is Accounting?

Accounting can be defined as a process of recording, summarizing, categorizing and analysing all the financial transactions of the company which have been conducted in a specified period of time. After the analysis of the company data the result is used to form the books of accounts which are also used later during the auditing of the company as well as filing of taxes.

The management of a business should be clear about the differences between Bookkeeping and Accounting. Bookkeeping is the process of only recording the transactions of a company but Accounting comprises of recording, analysing and categorising of the transactions of the company. In a layman’s language Bookkeeping is the sub set of Accounting.

Why Accounting Important for Companies?

Accounting helps in analysing all the functions of the business to finally get a picture of the financial status of the business. It forms the medium through which we can understand the what is the status of each of the function and does the management need to focus on a specific function. Accounting helps in the following:

1.Future Planning of the Business

Accounting of the company helps the management assess the status of the business and then compare it with the present competitors. With all the numbers in hand, the management can set gals for the business and can decide where it should focus more. The management can also look into the expansion of the business into other markets or trying out new products. 

2.Budgeting

Having a budget is very important as it provides a guideline as to how much should be spent in a particular department. Budgeting also helps in keeping the company out of any debt and can also help in getting out of a debt situation. The management can anticipate the resources required by the company. The management can anticipate the resources required by the company in the future and can devise a strategy accordingly.

3.Increasing Business Performance

Accounting will help understand how effectively the company is functioning. Using the financial reports, the management can understand the loopholes where the business is unable to work properly. The management can also compare the performance of the various departments and accordingly decide what remedial measure should be taken.

4.Deciding the Liquidity ratio in the Business

Accounting will help the management keep track of all the expenditure and profits so that there is an optimum level of liquidity in the company. Keeping a high liquidity in the company will not be the correct utilization of the resources at hand whereas keeping low liquidity in the company can result in the non-utilization of business opportunities. 

5.Better Control

The management can use Accounting to place checks in the various functions performed by the business. This will help the company to avoid losses in the long run and also keep the assets of the company safe.

6.Preparing for the other Reports

The reports prepared at the end of the accounting function helps greatly in the preparation of other important reports such as Auditing Report, Tax related reports, etc. when all the reports are combined and analysed then the management can take the correct decisions for the future of the company.

7.Compliance

One of the simplest yet the strongest reason for using accounting is that it helps to keep a company compliant to all the rules and regulations of the jurisdiction. Being a non-compliant entity can attract penalties and in some cases may lead to the liquidation of the company.

If you are looking forward to start a business or are an owner of a small business, you might feel that you can handle the accounting of the business by yourself, but accounting for a company can be complicated at times and may require help from a professional. These professionals will provide a customized solution for the problem faced by the company.

If you are looking for professional assistance in the matters of Accounting in the United Arab Emirates, then JAXA Chartered Accountants can help you. They also provide a help in the matters of Accounting, Auditing, Tax and VAT related queries and provide many more services. Contact Us and know more about the services which are provided by JAXA Chartered Accountants.