Why Is Accounting Necessary?
Accounting is a back-office function in which employees do not have direct contact with customers,
product developers, or manufacturing. Accounting, on the other hand, is critical to a company's
strategic planning, growth, and compliance requirements.
Accounting is required for business growth. It is impossible for a company to make smart
financial decisions through forecasting unless it has insight into how its business is performing.
A company would be unable to tell which products are its best sellers, how much profit is made
in each department, and what overhead costs are stifling profits if it did not have accounting.
Accounting is required for funding. External investors want assurance that they are investing in
the right things. Prior to receiving private funding, investors will typically require financial
statements (often audited) to assess a company's overall health. Debt financing follows the
same rules. As part of the underwriting and review process for issuing a loan, banks and other
lending institutions will frequently require financial statements in accordance with accounting
rules.
Accounting is required for owner exit. Small businesses that are looking to be acquired
frequently need to present financial statements as part of the acquisition or merger process.
Rather than simply closing a business, a business owner may try to "cash out" and receive
compensation for building a company. The accounting records of a company are used to value it.
Accounting is required in order to make payments. A business will inevitably incur debt, and part
of the responsibility for managing that debt is to make timely payments to the appropriate
parties. Without actively cultivating these business relationships, a company may lose a key
supplier or vendor. Accounting allows a company to always know who it owes money to and
when those payments are due.
Accounting is required in order to collect payments. A business may agree to give its customers
credit. Instead of collecting cash at the time of the agreement, it may offer trade credit terms to
the customer, such as net 30. Without accounting, a company may struggle to keep track of who
owes it money and when that money is due.
Accounting services may be required. Public companies are required to publish quarterly
financial statements in accordance with GAAP or IFRS. A company may be delisted from an
exchange if it does not provide these financial statements. A company may face fines or
penalties if its tax accounting is not up to date.
Accounting Illustration
Assume a company sends an invoice to one of its customers to demonstrate double-entry accounting. A
double-entry accountant records a debit to accounts receivable, which flows to the balance sheet, and a
credit to sales revenue, which flows to the income statement.
When the invoice is paid, the accountant credits accounts receivable and debits cash. Because all
accounting entries are balanced against each other, double-entry accounting is also known as balancing
the books. If the entries aren't balanced, the accountant knows there's a problem in the general ledger.
Accounting is a back-office function in which employees do not have direct contact with customers,
product developers, or manufacturing. Accounting, on the other hand, is critical to a company's
strategic planning, growth, and compliance requirements.
Accounting is required for business growth. It is impossible for a company to make smart
financial decisions through forecasting unless it has insight into how its business is performing.
A company would be unable to tell which products are its best sellers, how much profit is made
in each department, and what overhead costs are stifling profits if it did not have accounting.
Accounting is required for funding. External investors want assurance that they are investing in
the right things. Prior to receiving private funding, investors will typically require financial
statements (often audited) to assess a company's overall health. Debt financing follows the
same rules. As part of the underwriting and review process for issuing a loan, banks and other
lending institutions will frequently require financial statements in accordance with accounting
rules.
Accounting is required for owner exit. Small businesses that are looking to be acquired
frequently need to present financial statements as part of the acquisition or merger process.
Rather than simply closing a business, a business owner may try to "cash out" and receive
compensation for building a company. The accounting records of a company are used to value it.
Accounting is required in order to make payments. A business will inevitably incur debt, and part
of the responsibility for managing that debt is to make timely payments to the appropriate
parties. Without actively cultivating these business relationships, a company may lose a key
supplier or vendor. Accounting allows a company to always know who it owes money to and
when those payments are due.
Accounting is required in order to collect payments. A business may agree to give its customers
credit. Instead of collecting cash at the time of the agreement, it may offer trade credit terms to
the customer, such as net 30. Without accounting, a company may struggle to keep track of who
owes it money and when that money is due.
Accounting services may be required. Public companies are required to publish quarterly
financial statements in accordance with GAAP or IFRS. A company may be delisted from an
exchange if it does not provide these financial statements. A company may face fines or
penalties if its tax accounting is not up to date.
Accounting Illustration
Assume a company sends an invoice to one of its customers to demonstrate double-entry accounting. A
double-entry accountant records a debit to accounts receivable, which flows to the balance sheet, and a
credit to sales revenue, which flows to the income statement.
When the invoice is paid, the accountant credits accounts receivable and debits cash. Because all
accounting entries are balanced against each other, double-entry accounting is also known as balancing
the books. If the entries aren't balanced, the accountant knows there's a problem in the general ledger.
