Accounting is how the firm records, organizes, and manages its financial data.
One should see accounting as a big computer, which tracks all your business transactions, taxes, estimates, etc. with raw financial data that then provide an easy-to-understand the narrative of your company’s financial status.
Accounting informs you if or not you generate a profit, what the cash flow is, the present value of your assets and liabilities of the firm, and the total amount of capital in the organization.
What is the accounting cycle
The accounting begins as soon as you enter any transaction — any operation or occurrence that requires paying from your business in your ledger.
This is part of bookkeeping to document transactions. So bookkeeping is the first phase in the so-called “accounting cycle” in accountants
6 Major steps in the accounting cycle
Here are 6 major steps of accounting cycle –
- To analyze the invoices and record the transaction in the appropriate books
- Posting correct entry to a ledger
- After posting to the ledger, the individual has to prepare an unadjusted trial balance
- Make adjusted entry during the end of the period
- Make an adjustment in the trial balance
- The last is to make a financial statement
Why is accounting important
Here are the 5 reason explaining why accounting is important.
It helps in planning growth
Any great trip begins with a plan. When planning the growth of your business, setting targets is important. How are the earnings supposed to look like a year from now? How about in 10 years?
Financial statements help to quickly determine how your company is evolving. Without reliable financial statements, it may be easy to rely on simple indicators such as “sales growth,” which does not give you a complete financial picture.
Has the cost of selling the product increased? Are the margins narrower? Are your goals for growth reasonable? You apparently can’t have an absolute answer without any of the financial statements.
Many small businesses cannot afford the cost of creating an accounting team, so it is better to outsource accounting work.
The financial institution look at accounting before lending money
Revised financial statements indicate where the business stands. They ‘re key if you’d like a loan to finance your businesses.
For example, assume you want to apply for a loan from one of the financial institutions. For average, you’ll need to have three years of financial statements, and a cash flow forecast for one year.
When you do not have an accounting program in place, it’s almost impossible to create all of these.
Proper accounting is needed if you are selling your business or getting an investor
Currently, you will not intend to court investors or sell your company. Nevertheless, leaving the options open is a good idea. And the only way to do this is now to bring in place a sound accounting system.
Potential investors or customers are supposed to have accounting reports showing that the company is profitable and on track to growth. A CPA will provide those records.
It shows how much money someone owes you
If a client owes you money it shows on the balance sheet as Accounts Receivable ( AR). It is done by the accounting program or by the accountant.
The balance sheet shows you how much of the AR you’ve been pocketing over the month, how much of this is still unpaid.
You can monitor how efficiently you are collecting the payment by making reference to your balance sheet. Instead, you can set stricter payment deadlines in systems, or better follow-up with customers to ensure you get your hands on the money you won when you need it.
Helps in tracking tax information
When your company expands, keeping track of all your reporting responsibilities about tax information could be challenging.
What’s more, you face the risk of misstating your income when there are mistakes in your financial reports. Any mistake with IRS could put you in trouble.
Strong accounting provides you with full, reliable financial reports, reducing the chance of breaching tax laws.
And, if you have an accountant filing your taxes for you, you can indeed be confident they will be completed on time and correctly.
