What Is The Role Of Accounting In Business?

Yash Thaker
16/08/2021

What Is The Role Of Accounting In Business?

In this blog, you will learn what is the role of accounting in business. Accounting has a vital role in running a business as it helps track income and expenditures, ensure statutory compliance and provide investors, management and government with quantitative financial information which can be used in making business decisions. It helps them stay in full control of their finances while minimising business tax and other overheads. There are three important financial statements generated by the records. These are the income statement, the balance sheet and the cash flow statement. It is important to keep the financial records clean and up to date as they provide important information such as:

The income statement provides you with information about the profit and loss
The balance sheet gives you a clear picture of the financial position of your business on a particular date
The cash flow statement is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.

Accounting can be classified into two forms: Management accounting and financial accounting. Management accounting helps to run the business, while Financial accounting reports on how well it’s running.

Why Is Accounting Important?

Now you know what is the role of accounting in business, it is time to learn why is accounting important. To run a business you need data, records, reports, analysis, accurate information about assets, debts, liabilities and profits. The accounting information is very important for the management or the decision making body of the organization. Information is crucial for every level of management. Accounting gives management the required information regarding the financial position of the business such as profit and loss, cost and earnings, liabilities and assets, etc. That is why accounting is important for a business.

Below is a list of tasks that accounting helps in:

It Helps in Evaluating the Performance of Business

Your financial records reflect the results of operations as well as the financial position of your organization. That is to say, they help you get a grasp of what is going on with your business financially. Not only will clean and up to date records help you keep track of expenses, gross margin and possible debt, but also help you compare your current data with the previous accounting records and allocate your budget appropriately.

It Ensures Statutory Compliance

Rules vary from state to state. However, proper accounting systems and processes will help you ensure statutory compliance when it comes to your business. The accounting will ensure that liabilities such as sales tax, VAT, income tax and pension funds etc. are appropriately addressed.

It Helps to Create Budget and Future Projections

Budgeting and future projections can make or break a business, and your financial records will play a crucial role when it comes to it. Business trends and projections are based on historical financial data to keep your operations profitable. This financial data is most appropriate when you are provided with a well-structured accounting process.

It Helps in Filing Financial Statements

Businesses are required to file their financial statements with the Registrar of Companies. Listed entities are required to file them with stock exchanges, as well as for direct and indirect tax filing purposes. Needless to say, accounting plays an important role in all these scenarios.

How Does Accounting Help In A Business?

When your business grows beyond a certain size, it is good to hire a specialist to handle the accounting, so that you can focus on running things. However, a good accountant can do far more than just free up your time. Businesses with accountants often benefit from a wide range of other services too, which help to save money, reduce risk, comply with regulation, manage growth and plan ahead. Here are some key ways in which an accountant can help your business:

Paying The Right Amount Of Tax

You don’t want to pay more tax than necessary, but underpaying will get you into trouble. As a result, you may err on the side of caution when it comes to your business tax return. However, an accountant can calculate your expenses and allowances with much more confidence and so should be able to find significant savings while avoiding those costly mistakes.

Saving Tax

An accountant keeps up to speed with tax law. As a result, they know all the ways you can legally reduce your tax bill. He or she can identify legitimate tax-efficient strategies such as the use of government incentives, allowances, expenses, offsetting losses, or changing the way you draw income from your business.

Improving Cash Flow

Managing cash flow is a vital part of the business that is often overlooked by startups. A business can run into trouble quickly if it does not have ready cash to spend, no matter how profitable it is on paper.

Setting Up Your Business

Many business ventures fail because the figures and forecasts haven’t been rigorously tested. When you draw up your business plan, an accountant can help you put some solid foundations in place. They can offer an expert second opinion unclouded by emotional bias and should also be able to offer constructive input into key areas such as your business model. A business plan signed off by your accountant is one that’s ready to roll and will be more attractive to investors too.

Reducing Your Workload

Once your business really takes off, you will need all your time to run day-to-day operations, rather than be occupied with the finances. Similarly, as the business finances become more complex, you will almost certainly need a specialist to take charge of them.

Bookkeeping And Financial Reporting

It is a fundamental part of managing your business’s finances and financial reporting is a legal requirement. An accountant can provide both as part of a complete service package.

Regulation

Broadly speaking, larger businesses are subject to more government regulation. Compliance with these requirements can take up a huge amount of your time and mistakes are both easy and potentially very damaging. Once again, an accountant can take this burden off your hands.

Funding For Growth

At some point, most businesses need additional fundings to grow. Securing finance from a bank or other source is a major bridge to cross – lenders and investors want to know they will get a return on their money. Your accountant will prove vital in presenting a strong financial case to the relevant stakeholders.

Growth Management

Sudden growth that you haven’t planned for can be as problematic as too-slow growth, leading to all kinds of difficulties relating to cash flow, tax, employees or office space, for example. An unmanaged growth spurt can even knock you backwards. A good accountant can help you react quickly and effectively to unexpected growth and turn it into an advantage.

Audits

Businesses over a certain size must undergo a statutory audit – in which case an accountant is a must-have. However, even for a smaller business, a voluntary, internal audit can be an excellent way to keep your business goals on course. This kind of audit reassures you that everything is ticking over smoothly, and is also an excellent way to prepare you for a statutory audit.

Buying Or Selling A Business

Mergers and acquisitions can be the quickest way to grow your business or enter a new market. If you’re thinking of buying up a competitor or complementary business, an accountant should be your first port of call. They’ll assess the practicalities and also look into the target company’s accounts to ensure everything is satisfactory.

Business Advice

People forget many accountants also serve as business advisers. They carry a wealth of knowledge that comes from working with clients from all walks of business, and an experienced accountant will have seen most of the problems and challenges that you may encounter. As a result, an accountant can provide an unbiased sounding board for your ideas, warn you of potential risks and alert you to opportunities.

What Are The Advantages Of Accounting In Business?

Now you know what is the role of accounting in business and its importance, it is time to learn about the advantages. Accounting is a process that involves recording the financial transactions related to business. The process includes summarizing, analyzing and reporting these transactions to regulators, agencies and tax collection entities. However, accounting has many benefits as well. Some of the advantages are as below: