Significance Of Accounting In Business

By Cathy Howard

Accounting is a crucial part of running a business. Many people mistakenly believe that if you are starting a small business, you really do not need accounting. However, this is not true. If you want your business to reach its full potential, you have to follow basic accounting practices. You might find accounting boring, but you cannot avoid it.

It organizes the transactions of a business by jotting down those transactions. In turn, this creates a financial statement or financial report that summarizes the data in a balance sheet or income statement. These statements are then used by individuals externally to determine the value of a company. If the company is publicly traded, these financial statements will be distributed to customers, competitors and employees as well.

When you start up a small business, you need an accounting system in place. This could help you create a record of all the revenue and the expenditure of your business on a daily basis. Maintaining this data is crucial because you will need it when you file for tax returns. You might also need it for legal purposes. If, in the future, you apply for a loan to expand your business, this data can help you get one.

Accounting for small businesses usually consists of three financial measures: Balance Sheet, Profit and Loss Statement, and Cash Flow Statement. These will help you keep track of the progress of how your business is doing.

Management in turn is given the responsibility of spending and allocating for business funds to make sure that the business runs economically and efficiently. Financial accounting statements are used to evaluate management effectiveness by showing how well they can spend allocated resources and to help assess whether management should be sent to work in another department or replaced altogether to increase the profitability of the company.

It's essential to emphasize that accounting shows information in determining a companys value to persons who will assess such externally. These income reports are given to individuals who are not part of the company and can be circulated broadly.

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