Why Accounting Is Considered The Backbone Of Any Business?

The activity of accounting is hundreds of years old and has been used since the inception of businesses as we now know them. Financial accounting is one of the key pillars that support business management and allow companies to function smoothly.

From literally keeping books of accounts and noting down every single transaction on a piece of paper to implementing modern accounting software, we have come a long way. However, the importance of accounting in business remains the same and its essence is still irreplaceable.

Irrespective of the manner in which it is performed, accounting is the process of recording, interpreting, summarizing, analyzing, and communicating the financial transactions of an organization. Whenever a transaction involving money takes place, accounting comes into the picture. It allows businesses to keep track of their finances and helps them make important decisions. Right from making journal entries to creating final accounts, accounting organizes the manner in which the finances of a business are managed.

Here are some important reasons why accounting is considered to be the backbone of any business:

Keeping A Record Of Transactions

The most basic reason why accounting is critical for businesses is that it allows them to keep an official record of transactions. Whether money is spent, received, or owed, it is always important to keep a record of the same for future reference. Accounting helps you realize these transactions by giving them form and adding them into real or digital books.

This record of transactions can be used for future references and creating important financial statements that allow businesses to make decisions that matter.

Preparing A Budget

Irrespective of the scale at which an organization operates and the industry it belongs to, budgeting always plays an important role in managing its finances. A budget allows you to plan your business processes keeping the estimated revenue and expenses in mind.

Accounting forms the base for creating a budget for any organization. Before you create a list of estimated expenses and income, it is important to go through the records that show the money you owe and are owed. Moreover, the financial performance of your business over time allows you to prepare a valid budget for a specific period of time. Without referring to your books of accounts, it is rather careless to prepare a budget for your business.

Calculating Profits And Losses

The Profit and Loss statement or income statement helps you record all the revenue earned and expenses incurred by your organization over a specific period of time. This allows you to calculate the profit or loss made by your business in the concerned financial year.

Statements like these help you ascertain the financial standing of your business and quantify how well or poorly your business has performed in a specific year. While you calculate profits and losses, the income statement also helps you ascertain the different sources of revenue earned and the different types of expenses incurred over time.

Calculating Taxes

Whether you run a startup or a multinational corporation, it is important to comply with the tax regulations and pay taxes on a regular basis. Accounting allows businesses to calculate the taxes needed to be paid for the concerned financial year. Moreover, it helps businesses to calculate the actual profit earned by them after deducting the different taxes paid. Financial accounting also allows businesses to keep records of taxes paid over time to analyse the progress made by them over time.

Identifying Trends Over Time

Especially when it comes to financial statements like income statements and balance sheets, businesses often compare the statements prepared over time to analyse trends in their performance and their progress over time. For example, comparing income statements prepared over the course of five years allows businesses to see how well or poorly they have performed. Moreover, it helps them understand the different trends in the expenses incurred and revenue generated from specific resources. Making such an analysis allows the management to make important business decisions to ensure growth in the future.

Obtaining Financial Aids

If an organization is in need of financial help, every lender or lending institution would ask for the company’s financial accounts over the last few years. The financial performance of your business as demonstrated by your accounts would influence the decisions made by lenders while providing you with financial aid.

Managing Cash Flow

Cash flow management plays an important role in business accounting. It allows businesses to keep track of the cash coming in (inflow) and going out (outflow) of the treasury. Maintaining a steady cash flow at all times is necessary to prevent financial gaps and manage risks that may arise in the future.

Accurate Business Valuation

If you are planning to sell your business, financial accounting helps you in the valuation process and allows you to come up with an ideal price for your venture. This involves taking into consideration all the capital, assets, and liabilities pertaining to your business. Similarly, if you are looking forward to mergers and/or acquisitions, the business accounts of the other party provide you with the ideal valuation price of the business.

Legal Evidence

If there is any dispute between a business and its customers, between two businesses, or between parties working for the same business, financial accounts hold key importance as evidence in a court of law. As your accounts contain all objective records of your financial transactions, they facilitate unbiased decisions made and judgement given in case of legal disputes.

The Final Word

These were some of the many reasons why accounting is considered as the backbone of any business. It is practically impossible to manage a business organization without financial accounting. If you are willing to leverage your accounting practices and make them more efficient, it is advisable to implement accounting software that best suits your business. These modern software platforms help you automate a range of accounting processes and relieve your team members from performing repetitive tasks while handling business accounts.

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Michael Caine

Michael Caine is the Owner of Amir Articles and also the founder of ANO Digital (Most Powerful Online Content Creator Company), from the USA, studied MBA in 2012, love to play games and write content in different categories.