What is Accounting? That was my first question when I started opting for subjects after high school, and like you, I also started the search for the answer, and the more I studied accounting, the more it fascinated me because accounting is not just a number game. There is much more to those numbers, and each number has got a reason for its existence. After more than eight years in the accounting and finance field, I can safely say that accounting is a kind of a nerve in the backbone which keeps pinching you if it is slightly out of order. It is a starting point for each business when they decide to grow. A plethora of accounting software has made it easy for the business owner to do accounting and achieve positive results and make economic decisions.
Let’s Start With It. What Is Accounting?
Accounting is the process of recording, classifying, summarizing economic and financial information for the users to make economic decisions. In other words, you can say it is the process to record business information, which is further analyzed to make a business decision.
If you take accounting as an information system, it is a process of recording business transactions and events.
Why Do You Need Accounting?
Accounting has many objectives. However, it may vary from business to business, depending on the specific business and user needs and requirements. Still, I would say that certain objectives are common across all businesses.
A) Systematic Record-keeping
It is always difficult for a business person and a normal human being to remember all the transactions that have taken place. There is still a need to have a system to store and record business information systematically. Accounting serves this purpose very artistically by recording all the business information in the books of accounts. The best tool that maintains a business account is Tally, which is also available now on Android and iOS with TallyDekho – Tally on Mobile App.
B) To Determine The Results of The Various Business Operations
Accounting plays a vital role in ascertaining the result of the business units and business as a whole. Everybody wants to know how their business is performing, and the levels of profits earned or losses. Accounting helps in analyzing operations in a particular period and, in a way, provide the overall picture of the business.
C) To Show The Financial Position of The Business
In addition to profit and loss information, a business must always know what assets and liabilities are. In other words, what is their financial position (in the form of the balance sheet), i.e., availability of cash in hand and banks, level of investments in inventories, level of short and long term liabilities? The financial position will display the financial strength of the business.
D) To Display Liquidity Position And Risk
I have often come across going concerned with many small businesses because of the lack of information on their liquidity. Accounting provides information on how an entity is generating cash and the cash flow requirements for an operation, levels of borrowings and repayments of long and short term borrowings, and distribution to the owners. It also helps in many other factors that may affect an enterprise’s liquidity and solvency.
E) Protection of Business Assets
Accounting provides valuable information on the assets owned by a business. The accounting information can help keep track of the assets and provide information on the historical cost of the assets.
F) To Facilitate Business Decision Making
Financial statements and accounting information provide valuable information on business operations, making it easy for business managers to make economic decisions and make timely decisions on various aspects.
G) To Meet The Requirements of Legal Authorities
There are legal requirements for business entities to keep proper accounting records according to the Companies Act. Sales Tax Act and the Income Tax Act also require entities to maintain accounting records.