Accounting helps organizations to achieve their goals by recording, summarizing, and presenting accurate financial information to its users. Building the right accounting system for a business can involve a significant investment of time and money.
Here are the 11 objective of accounting that demonstrates the importance of accounting systems in organizations.
A reliable accounting record is the backbone of an accounting information system. The basic purpose of accounting is to keep a systematic, accurate, and permanent record of all transactions of a business such as sales, purchases, income, and expenses.
Accounting allows organizations to plan the use of its limited resources such as money and labor by preparing budgets. The budgeting process helps organizations plan ahead by anticipating future business needs and identifying potential bottlenecks. Budgets improve the efficiency of organizations by diverting resources to the most critical business processes.
3. Management Decisions
Accounting information helps managers in evaluating a range of decisions to improve the profitability and efficiency of business such as:
• Pricing decisions
• Limiting factor analysis
• Financing decisions
• Investment appraisal
4. Performance Measurement
Accounting helps determine the performance of a business by summarizing financial information into quantifiable measures such as revenue, net profit, expenses, etc. It is important for organizations to regularly and reliably measure their key performance indicators so that they can improve by making valid comparisons with their past performance as well as with industry benchmarks.
5. Position Analysis
Financial statements show the financial condition of a business by showing, for example:
• Cash flow
• Capital investment
• Cumulative earnings
6. Liquidity Assessment
Poor cash flow management is often cited as the number one reason many startups fail. Accounting helps businesses reduce the risk of bankruptcy through early detection of financial bottlenecks and cash flow management so that the business always has sufficient cash to pay its financial commitments.
Organizations that lack funds must submit their accounting information to lenders in order to obtain funding. Whether a company is applying for a bank loan or a shareholder investment, it will need to provide its accounting history as well as financial plans, projections, and forecasts.
8. Internal Control
One of the primary purposes of an accounting system is to place internal controls within an organization to safeguard its valuable resources. A company’s assets such as cash, buildings, and inventory are all susceptible to loss from theft, fraud, error, obsolescence, damage, and mismanagement. The accounting information system must ensure that these risks are reduced to an acceptable level by placing various controls throughout the organization.
9. Legal Compliance
Accounting helps organizations meet their legal responsibilities by providing accurate information about their financial rights and obligations. Accounting is also a legal requirement for most businesses. The law requires organizations to maintain accurate accounting records and report their financial results to stakeholders such as tax authorities, shareholders and regulators in a timely manner.