13 Reasons Why Accounting is Important

Here is our list of reasons why accounting is important. 

Have you ever wondered why accounting is important? There are plenty of reasons that explain the importance of accounting, beginning with maintaining accurate financial records and tracking and managing transactions. Other reasons include aiding in decision-making, communicating key business results, and providing valuable insights. Understanding the importance of accounting can help business owners implement best practices. 

These ideas are similar to examples of bookkeeping vs accounting, common accounting errors, and reasons why bookkeeping is important. 

This list includes: 

• accounting purpose
• accounting importance
• hiring an accountant
• accounting services
• accounting for small businesses 

Here we go!

List of Reasons Why Accounting is Important 

Accounting is defined as the practice of recording and tracking a company’s financial transactions. Accountants work to summarize and simplify complex insights to report this information to companies and clients. The work of an accountant is crucial in helping business leaders make informed decisions, budget their finances wisely, and plan for the future. 

Let’s dive right into the top reasons why accounting is essential for all businesses. 

1. Maintains accurate records 

Accountants are tasked with keeping detailed records of a company’s financial information, from expenses to transactions. Access to this information allows for the accurate assessment of an organization’s financial performance over time. 

There are many advantages and benefits to having an accountant keep track of your company’s finances, including: 

• Providing a clear and accurate picture of a company’s financial health
• Maintaining the most accurate financial records 
• Keeping historical data and records 
• Assisting in creating realistic budgets and future financial planning
• Keeping companies safe from regulators and fines 
• Providing easy access to the most up-to-date records 

With an experienced accountant on the team, you can rest assured knowing that you have access to your company’s most up-to-date and accurate financial information, as well as historical data. Access to these types of records empowers business leaders and employees to be knowledgeable about the organization while planning for the company’s future. 

2. Tracks and manages transactions 

In the world of business, every direction of cash flow matters – whether it is money coming into the company or money exiting by way of expenditures. As a result, one main accounting purpose is to help businesses keep track of all transactions, such as expenses, income, outstanding invoices, and owed payments. Doing so helps business leaders stay on top of the organization’s finances. 

In most cases, accountants use software and other technology to record these transactions. Some accounting software also has integration capabilities, which allows professionals to integrate with other programs and makes the process smoother. Overall, accounting software and tools allow for the meticulous efficient tracking of financial transactions. 

3. Provides valuable insights 

Accounting is an important practice for internal users of an organization, such as employees and stakeholders. Each accounting report that is generated contains valuable insights that can help leaders make informed business decisions.  

These are just some key financial statements and the information they provide users: 

• Income statement, providing information about profits and loss
• Balance sheet, providing insight into the company’s financial position
• Cash flow statement, providing data about when cash was generated and spent during a specific timeframe 

Management teams can highly benefit from the information housed in these reports, often using insights from accounting to make critical decisions. For example, a business leader may turn to accounting to aid in improving operational efficiency. 

4. Helps with budgeting 

Establishing a budget is an important part of accounting for small businesses and large companies. Budgeting is all about balancing your spending in order to meet financial goals. However, a lot of planning and preparation goes into setting a budget. 

To set a budget, accountants need to take the following steps: 

1. Analyze income, including fixed expenses and existing liquid assets. 
2. Evaluate expenses, such as operational costs and spending. 
3. Anticipate potential future investments, like expanding operations or acquiring assets. 
4. Plan for a contingency or reserve fund to address unforeseen circumstances.
5. Review historical data and financial performance, identifying spending patterns and revenue generation trends.
6. Assess how the company’s numbers line up with its financial goals, ensuring that the budget aligns with operational needs. 
7. Establish key performance indicators (KPIs) to track and measure success. 

Businesses often use budgets to help manage and pay off debts, however, budgeting is also a valuable tool to boost savings. For example, if a business owner is currently bringing in $4,000 per month and would like to put $1,000 into savings monthly, their accountant would need to ensure that less than $3,000 is spent on expenses. 

Following these steps allows accountants to create a budget that accommodates an organization’s current financial landscape while also planning for the future. 

5. Communicates important results 

When thinking about accounting importance, accountants play a critical role in translating complex financial results. Accountants are often tasked with analyzing reports and simplifying their findings so they are more easily digestible for leaders. 

Accounting helps communicate important results about a company, such as: 

• Financial standing and well-being
• Key metrics, such as return on investment (ROI) 
• Financial trends and patterns 
• Cost-benefit analyses 
• Strategic insights 

Accountants are highly skilled when it comes to transforming raw financial data into an easily digestible story with key takeaways. Accounting is especially effective in communicating key insights that drive decision-making and business success. 

6. Determines a company’s liquidity 

Accounting plays an important role in determining a company’s liquidity. Liquidity is defined as the cash and other liquid resources that a company can use to pay off financial obligations. 

Accountants can use different measures and processes to determine a company’s liquidity, including: 

• Current ratio analysis
• Quick ratio analysis
• Cash flow assessment 
• Capital management 
• Contingency planning 
• Cash reserves 

In addition, it is equally important that accountants continue to monitor liquidity and adjust financial strategies accordingly. Determining a company’s liquidity is crucial when it comes to reducing the risk of bankruptcy and debt. 

7. Ensures compliance 

One of the primary functions of accounting is to ensure compliance with the many laws, regulations, and standards that exist around taxes. When performed correctly, accounting helps ensure accurate reporting of financial assets and liabilities to tax authorities like the Internal Revenue Service (IRS). 

These are some ways that an accountant can help safeguard a company’s financial well-being: 

• Navigating complex tax laws and regulations 
• Filing the appropriate taxes each year 
• Conducting regular compliance checks year-round
• Maintaining accurate records and documentation in case of audits 
• Creating a financial safety net through savings 
• Preventing fraudulent activities within the organization 

Proper accounting can help a business operate ethically and transparently under the guidance of an experienced accountant. Hiring an accountant is an ideal way to contribute to your company’s long-term success, financial health, and reputation. 

8. Aids in tax preparation 

Filing taxes is an important part of running a business. Accountants are tasked with keeping track of income, expenses, and deductions so they can easily file taxes when the time comes to do so. 

Accountants can bring a world of in-depth tax knowledge to business leaders. In fact, an accountant can help a business determine how much it owes in taxes, how to pay taxes, and how to prevent audits and penalties from the IRS. 

These are a few ways that accountants keep businesses prepared for tax season: 

• Keeping accurate financial records
• Conducting year-end reporting and closing procedures 
• Identifying eligible deductions and credits 
• Communicating with tax authorities on your behalf 
• Filing taxes on time 
• Ensuring compliance with new and existing tax laws
• Providing essential audit support 

Accountants can take the burden off the shoulders of business owners. For example, accountants always keep detailed documentation on hand in case of an audit. Accounting professionals can also educate clients about taxes, including strategies for success and new regulations to adhere to. 

By taking advantage of an accountant’s expertise, business leaders can conquer tax season through diligent preparation and completion of all tax forms. 

9. Helps businesses evaluate performance 

Evaluating performance is crucial to a company’s success. By identifying strengths and weaknesses, business leaders can adjust their strategies and come out successful. 

Accountants can help leaders evaluate their company’s performance through measures like: 

• Key performance indicators (KPIs) 
• Return on investment (ROI) assessment 
• Financial ratio analysis 
• Cost analysis and control 
• Detailed budgeting 
• Trend analysis 
• Cash flow management 
• Customer and market analysis

Benchmarking against industry standards is also a helpful practice in evaluating your company’s performance. This comparative analysis allows businesses to understand where they stand in comparison to other companies in similar industries. This practice also provides an opportunity to identify areas of improvement. 

By diving deep into an organization’s financial data, leaders can identify areas of strength and weakness. Accountants can act as much-needed guidance, steering business leaders toward success. 

10. Helps anticipate future financial projections 

A big part of accounting and budgeting is looking ahead toward future projections. Planning for the future can make or break an organization while paving the way for sustainable growth. 

An organization’s financial records play an important role in planning, so designating an accountant to set a budget for your business is one of the best ways to set yourself up for success. 

These are some helpful steps that accountants can take when planning for future financial projections: 

• Analyze trends, patterns, and insights to create data-driven forecasts.
• Stay on top of economic and industry trends to understand external factors that impact the business. 
• Use a budget as a roadmap to anticipate future financial needs.  
• Conduct risk assessments to identify potential obstacles.
• Develop mitigation strategies for unforeseen events. 

When considering accounting importance, bringing in an accountant to make accurate financial projections can instill confidence in investors and stakeholders. This forward-looking practice empowers business owners to lay a strong groundwork that positions the company for resilience and success in years to come. 

11. Can be used for internal and external communications 

Effective communication is crucial when it comes to accounting for small businesses and large businesses. Communicating critical information can connect the various aspects of an organization, from employees to investors. 

Accountants can communicate a company’s finances to internal and external shareholders by means like: 

• Budget presentations 
• Investor relations presentations 
• Financial management dashboards 
• Internal financial reporting 
• External financial statements 
• Employee financial training 
• Annual reports 

Accountants can act as the liaison between internal and external stakeholders. They are responsible for taking complex financial data and simplifying it so any audience can understand. Whether they are addressing internal teams or external investors, suppliers, or vendors, accountants are highly skilled at communicating financial information effectively. 

12. Increases employee and investor confidence 

In the world of accounting, trust has the power to fuel growth. If stakeholders trust a company, they will most likely invest more time or money into the business. When a company has exceptional accounting practices, there is a high probability that both employees and stakeholders will be satisfied. 

When employees have a deep understanding of their organization’s financial health, they will be more confident and positive about the stability of their workplace. Financial presentations and internal communications are great avenues to communicate key results and updates with team members. Sharing regular updates about a financially stable company can also be a helpful tool in retaining and attracting talent. After all, employees are likely to stay with a company that is financially stable and secure. 

Similarly, investors can share a positive outlook on the company if they are aware of positive financial trends and occurrences. Communication with investors can be conducted through simplified reports that highlight the company’s financial performance and initiatives. Shareholder meetings are also an ideal time to communicate updates and answer outstanding questions. 

Building trust among employees and shareholders is crucial. By doing so, you are instilling confidence in key players who contribute to and invest in the company’s continued success. 

13. Improves a company’s financial health 

Maintaining financial health is crucial to a company’s success. The practice of accounting can help a company improve its overall financial health by tracking and managing daily expenses, as well as guiding financial strategy. 

Accountants focus on aspects like strategic budgeting, cost management, and financial forecasts – all of which contribute to informed decision-making. The role of accounting has the power to push an organization toward financial success and well-being. 

Conclusion

Accounting serves as the backbone of an organization’s financial health. This is why business owners and employees must understand the crucial role that accounting plays in a company’s overall success. From communicating a company’s financial results to aiding in tax preparation and beyond, accounting is essential in the business world. 

Businesses need accountants to not only keep accurate financial records but also to serve as strategic advisors. Accounting can provide valuable insights and guidance for companies trying to navigate the complex financial landscape. 

Next, check out common bookkeeping mistakes, bookkeeping basics, and accounting software. 

Let Rigits help you

Grow confidently Sleep better at night

Get stuff off your plate

Let's chat!