What is Accounting and Why Is It Vital

Accounting refers to the recording, measurement and analysis of monetary details of a business and is therefore a function that is critical to any business, not only for regulatory purposes but also to ensure the viability of the business.

There are various sub-sets of accounting. For example:

Tax accounting

Every business is required to report and pay taxes. Tax legislation can be extremely complicated and so this is a specialized area of the profession.

Financial accounting

Financial accounting deals with the preparation of a company’s financial reports. This is essential to provide information for the owners and stockholders, suppliers and the government about the financial performance and viability of a business.

Management accounting

Management accounting is involved with the measurement and analysis of financial data to assist in making management decision. This involves analyzing the reports and management accountants often use ratios to analyze results. For example, comparing accounts receivable with sales gives an indication of how long a business takes to get paid for sales made on credit. The longer this is, the more likely a business will encounter a cash flow crisis.

Auditing

A good accountant is vital
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Auditing involves checking the processes and procedures to give a degree of confidence that the financial reporting of a business is accurate. An audit will not generally be able to guarantee that the reports are accurate. Rather it examines the processes in an effort to minimize the potential for error and fraud. Larger companies often have an internal auditor (someone who works in the business) as well as an external auditor from an external accounting firm. Smaller companies may only have an external auditor and small businesses may not have an auditing function at all.

The day to day record keeping functions are generally done by a person called a bookkeeper although in small businesses the bookkeeper is often the owner of the business.

Larger businesses tend to have an accountant on staff and use external accountants for auditing and specialist advice whereas small businesses may use the services of a bookkeeper but tend to rely on the assistance of external accountants.

An ‘accountant’ is a higher skill level and involves considerable tertiary education. It is also important to ensure that an accountant is a member of a professional body that regulates the actions of their members and ensures continual professional development.

However, as we said at the beginning, the accounting function is critical to the success of a business and ensuring your business gets this discipline under control is vital.

Here is a video about why accounting is important


Until next time,

The Ken