Accounting is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.
Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing, and reporting these transactions to oversight agencies and tax collection entities. Accounting is the language of business.
Accounting is also defined as the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least of a financial character and interpreting the results thereof. It is the measurement, processing, and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494.
Below are reasons why proper accounting is important to a business
Evaluation of Business Performance
As a finance professional, you are often asked to present information that evaluates and assesses the performance of the business. This information helps stakeholders determine what course of action may be best to take and expect results. Evaluating the performance of a business evaluates the performance of a business by examining an entity’s financial results. Evaluating the performance of a business is an important part of the accounting process. Using financial reports such as income statements, balance sheets, and cash flow statements, it’s possible to determine if a company has generated profits, how its assets are financed, how much money it has on hand, and how successful it has been at raising capital to invest in its operations.
One way to determine if business operations are sound is to evaluate the level of profits the company makes. Typically, in an accounting class, you will be taught the various measures of profitability. Some key measures of profitability include: Net income or the bottom line that remains after all costs including depreciation have been deducted from revenues; Return on assets (ROA), or a measure of how efficiently managerial and financial decisions are made, measured by dividing net income by total assets; Return on equity (ROE), or a ratio that indicates how profitable a company is for its shareholders.
With Statutory Compliance, you can ensure that your business operations and procedures are in line with current legislation. Many companies in the US have to manage statutory compliance-related issues and even fines. This is however a very big concern for non-US-based financial services firms who are managing client portfolios for US clients.
Helps in Budget Creation and Future Projections
Budget, along with future projections, is a critical aspect in determining the viability of your new venture. If you intend to obtain funding from an outside source, a solid budget and a projected profit and loss statement will be required. Businesses that require outside funding must prepare a long-term forecast based on the assumption that everything will go as expected. Based on existing performance and analysis, how much money will your venture burn through before turning a profit? How much revenue will it take to support yourself? Do you have enough cash in the bank to carry you through those times when revenues will fall short of projections?
Looking at your income and expense projections, you may see only enough difference between the two to get by. But that doesn’t mean a good budget isn’t important. It’s critical! If you can manage a little bit of growth, your budget needs to be flexible enough to grow with you. The future is always in motion. A good budget tells you where it’s going and how fast, so you can guide your financial train through all kinds of curves.
Filing Financial Statements
Filing Financial Statements offers clear and concise guidance, practice tips, and checklists on filing financial statements, including the most effective strategies to use when dealing with review comments. Filing financial statements is a legal requirement for most companies. Whether you are an SME or from the corporate sector, we will ensure all your financial statements are prepared and filed with full compliance.
Filing financial statements is an important part of ensuring the accuracy and transparency of your financial reporting. Some companies may have to file periodic financial statements purely for regulatory reasons, while others seek to ensure increased stakeholder confidence by making them publicly available.
The American Bar Association has provided the essential compendium of financial statement law for nearly 25 years. This Third Edition continues the tradition, with broad coverage to help you find answers to any financial reporting question. It updates existing material in light of Securities and Exchange Commission (SEC) guidance, recent cases, and federal regulations; provides new observations regarding a statement of cash flows; provides a detailed explanation of significant developments in the field of accounting; and much more.
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You avoid audits by using Proper Accounting
Good accountants are critical to avoiding audits. A good accountant can help you avoid surcharges and penalties while reviewing your accounts and dealing with the IRS. In today’s world of ever-increasing taxation and regulation, good accounting practices are the best way to avoid fines or other problems with the IRS and SEC. Although the IRS is harsh and has a variety of fees, penalties, and interest that it can charge you if you make a mistake on your taxes, it’s not impossible to escape them. You don’t have to pay any penalties or fines. A good system of accounting ensures that you have all of your paperwork in order, so when it comes time to pay contractors, make purchases and inventory, handle the money left over at the end of the day, or report income and expenses to the IRS, you’ll never get lost – and always make the right choices.