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The importance of accounting

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1.         INTRODUCTION

Accounting deal with different clients; these may be private people, the government or a business entity. The major purpose of the accounting is to ensure the accuracy of the financial records of a business, to guarantee that taxes are paid on time to prevent other fraudulent acts that a business might commit regarding its financial conditions. Due to the accounting, one can prepare, analyze and verify a company’s financial statements to provide accurate information to those who rely on it.

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Accounting normally classified as public accounting, management accounting, government accounting, etc.

2.         DEFINITION OF THE ACCOUNTING (defines it and mention about it and why it is important).

Accounting is the process of recognizing, valuating and transmitting economic or financial information to the end users Stakeholders) in order to make valid judgments and decisions according to the light of the information provided. Accounting is used in all forms of the business in order to judge and evaluate the financial position of the business.

Accounting not only provides information to the external user such as creditors, governmental agencies, and general public but also serves the internal users such as company’s management and employees (Russell, 2006).

3.         DEFINITION OF FINANCIAL STATEMENT

Financial statements are one of the primary means by which economic information about a firm is communicated to interested users. The four main forms of financial statements are the balance sheet, the income statement, the statement of cash flow and the statement of owner’s equity. Financial Statements are considered to be an important piece or source of information not only to the external users of the information such as investors, creditors, government and the regulatory agencies and analysts, but also to the internal users, which predominantly includes managers (Sacco, 2008).

3.1       BALANCE SHEET (Define it and talk about it and mention the benefit of it)

The balance sheet provides an overview regarding the company’s financial position. In the same time the balance sheet also discussed about the company’s assets, liabilities and owners equity. Balance Sheet provides a more clear reflection of any company’s performance in recent past. The balance sheet is an ideal starting point for the analysis of any organization’s resources and obligations including the liquidity and solvency of the organization. Balance Sheet are collective and cumulative in nature, as they reflect the effects of all the transactions that took place since the start of the business to the last date accounted for in that financial year (Best, 2008).

3.2       STATEMENT OF CASH FLOW (Define it and talk about it and mention the benefit of it)

Cash flow statement discussed over the company’s operating activities (review the increase and decrease in current assets and current liabilities), investing activities (review over the sale and purchase of fixed assets) and financing activities (review over issuance/payment of loan, issuance/repurchase of share, dividend paid etc) during the year. It also discussed on the in flow and outflow of the cash and also on the cash equivalents (Best, 2008).

3.3       INCOME STATEMENT (Define it and talk about it and mention the benefit of it)

One of the primary objectives of any business enterprise is to earn a profit. The profit earned by an enterprise is a yardstick that managers, investors and the creditors use to evaluate the future prospects of the business. To many individuals, the income statement is the primary financial statement because it provides information concerning the firm’s profitability. Income Statement debates over the company’s revenue generation power, cost behavior and structure and in the end on Net Income (Best, 2008).

4.         FINANCIAL STATEMENT USERS

4.1       INTERNAL USERS (How each of the users can use the financial             statement and how it is beneficial for him)

Usefulness for the Managers

Receivable management policies and identifies the firm’s recovering abilities.
In the inventory section mangers reviewed the inventory management policies like how much inventory is idle, how much is in use, etc (Nawaz, 2010).
Current assets and current liabilities also suggest the firm’s liquidity position and sends signal to the mangers that firm is financial crises or on the edge of financial crunch (Nawaz, 2010).
Usefulness for the Employees

To make day to day operating decisions
To allocate new jobs, i.e. create new job vacancies or lay-off people, depending on whether the company wants to grow or not.
4.2             EXTERNAL USERS (How each of the users can use the financial                                    statement and how it is beneficial for him)

Usefulness for the Stockholders

Equity suggests that what is the pay back or adequate return to its share holders.
Dividend measures the ability of a company to pay dividend on preference share, which carry a stated rate of return.
Dividend yield which expressed as a rate of return on the market price of the stock.
Usefulness for the Debt Holders

Section of EBIT and interest expense shows the debt servicing ability and capability of a company and also indicator of a company’s ability to meet its interest payment obligations (Nawaz, 2010).
Debt section shows the percentage of total asset financed by debt, from a creditor / bank’s view point, the lower debt ratio gives a positive signal to the creditor (Nawaz, 2010).
5.         ACCOUNTING PROCESS

The following steps are required to complete and execute the accounting cycle:

Step#1:           Invoice is the major document to record this transaction. The financial accountant posted this transaction in the proper head of accounts with the help of invoice.

Step#2:           The financial accountant journalizes this transaction in general journal and made the following accounting entry:

Debit             Credit

                        Cash                                       $15,000

                                   Sales                                                   $15,000

Step#3:           After journalizing the accounting entry this transaction is posted in the ledger. In this particular transaction, asset is increased (debit) due to sales of merchandise on cash and revenue is increased in (credit). In addition, accountant uses the ledger accounts of CASH and SALES for this transaction (Meigs, 1999).

Step#4:           An Accountant posted this transaction in ledger by their respective accounting heads. In this transaction, cash increases in debit while sales revenue increases in credit side.

Step#5:           After balancing the ledger of cash and sales this transaction is reported in the trail balance which helps the accountant to evaluate and assessed that all the accounting entry is equal or not by comparing them. Moreover, trial balance provides an opportunity for the accountant to omit and rectify all the possible errors and also help in generating the worksheet.

Step#6:           The important and pivotal function of accounting cycle is the preparation of financial statements. This particular transaction is reported in Income statement (in the form of Sale Revenue), in Balance sheet in the form of Cash (Current Asset Section) and finally in the Statement of Cash Flow.

Step#7:           There is no significant moment in the Cash and Sales so there is no need to make the adjusting entries while the closing entries is only made for the Sales Revenues which the company generated and incurred during the year. No closing entry is made for Cash (Meigs, 1999).

Step#8:           After passing the closing entries an accountant prepares the post closing trial balance in order to ensure that all the transaction is properly recorded and posted in their respective head of accounts. In addition, this post closing trial balance helps the account to prepare the opening entries for the next fiscal year (Meigs, 1999).

6.         CONCLUSION

All in all, it is very important to know all the traits and attributes of the accounting and its process. Accounting provides viable, timely and accurate report to its internal and external users. Through the accounting management is able to take better judgments and decisions on the basis of accounting data. Moreover, the role of accounting in any business growth is pivotal and no one denies its importance in the organization.

REFERENCES

Best, Ben. (2008). The Uses of financial statements. Retrieved from

            http://www.benbest.com/business/finance.html

Meigs, Robert F., Mary A.Meigs, Mark Bettner, Ray Whittington. Accounting: The basis            for Business Decisions.10. McGraw Hill

Nawaz, M. (2010). Impact of financial statements. Retrieved from

            http://www.howtoadvice.com/FinancialStatements

Russell, Michael. (2006). Accounting – a practical definition. Retrieved from

            http://ezinearticles.com/?Accounting—A-Practical-Definition&id=387501

Sacco, Dr. John. (2008). Definition and elements of financial reporting. Retrieved from

            http://princewilliam.gmu.edu/course/govt490/C1-index.html

 

Cite this The importance of accounting

The importance of accounting. (2017, Feb 16). Retrieved from https://graduateway.com/the-importance-of-accounting/

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