Principles of Accounting: Importance of Accounting

• Accounting plays an important role within the organisation
• Accounting is important for a number of reasons:

Importance and role of accounting

• It allows the business to record transactions for future reference
• Provides information about whether a business is profitable or not
• Provides information about the liquidity of the business
• Provides information about the assets of the business
• Provides information about the liability of the business
• Provides information about the capital employed by the business
• Provides information about the nature and amount of a business’s expenses
• Provides information about a business’s cash flows
• Provides quantitative information to various stakeholders including:
  • The owners of the business
  • Workers
  • Potential Investors
  • Bankers
  • The Government
  • Competitors
• Allows various stakeholders to calculate the financial position of the business
• Allows the government to calculate payable taxes
• Helps the government in setting economic policy
• Allows bankers to decided whether to lend or not lend money to a business
• Allows management to calculate business trends e.g is profit increasing or decreasing, is the business growing or shrinking etc
• Allows the business to produce financial statements:
  • Statement of Financial Position/Balance Sheet
  • Statement of Comprehensive Income/Income State
  • Cash Flow Statement
  • Statement of Changes in Capital
• Aids management in making decisions
• Allows competitors to gauge their own performance
• Helps the business to plan and budget for the future
• Helps the business in setting the prices of products
• Helps in managing cash flows
• Allows businesses to comply with the law (businesses are explicitly or implicitly required to keep books of accounts by the law)
• Helps in filling financial statements with regulators where filling is required
• Helps with courting investors

NB Since the entire world economy is made up of business/organisations which all include accounting as a function, accounting is a vast field whose importance is all encompassing. Without accounting there is no business. The above list is note even exhaustive

If you are not familiar with some of the terms used above be patient, all will be reviewed as you continue to study the subject

To access more topics go to the Principles of Accounts Notes.