Accounting is defined as the art of accurately recording the transactions and financial accounts of a business, keeping them in a systematic manner in order to provide accurate data and information needed for a wise decision making.

Accounting is also the art of monitoring the activities of a business, including its losses and gains. It also makes sure that all dues to the government, in the form of taxes, are followed by the business.

Accounting is then the "art of recording, classifying, and summarizing, in a significant manner, and in terms of money transactions and events which are in part at least, of a financial character and interpreting the result thereof."

Understanding the Importance of Accounting

In order to understand the importance of accounting, you have to try answering some key questions such as:

1. How much was earned last year versus this year?
2. Is the business improving?
3. How much cash is available?
4. How much money is owed by the company?
5. How much money is owed to the company?

You also have to understand the different accounting methods used in businesses.

Cash Method vs. Accrual System of Accounting

The cash method is often in contrast with the accrual system of accounting. The cash method records transactions on the date they were paid or received regardless of the date they were incurred, whereas the accrual method records the transactions on the date they were incurred, or in other words, the date of the invoice.

Single Entry vs. Double Entry

In recording accounting transactions and in bookkeeping, there are two systems that are used by businesses, the Single Entry and the Double Entry. The single entry system is also known as "imperfect accounting". It is a method of bookkeeping relying on a one sided accounting entry to maintain financial information. This is mostly used by small businesses.

The Double Entry accounting system on the other hand is the only one that satisfies all objectives of systematic accounting. It relies on the premise that answers involving questions regarding the business can only be acquired from up-to-date accounting records.

So How Important is Accounting?

It is very important to keep in track of all the business records because if it is not done so, it will be difficult to keep track of the income as well as the losses of businesses. Moreover, if there are instances of an income not accurately declared due to lack of accurate records, the government may impose an incorrect tax for the company.

By referring to the business records and financial accounts which are properly managed and kept by an accountant, wise decisions could be made especially in cases of a company becoming insolvent. These records and accounts help the business owners to plan effectively for the future and to make proper investments. In addition, accurate and proper records will help fix the price of a business should it be sold.

Conclusion

Accounting is not a science but an art as it provides one of the procedures by which accounting objectives can be achieved.

Accounting is important for every business. It does not only help the company in tracking and monitoring the transactions and cash flow to make sure it moves correctly; it also provides the business owner an insight on the potential of the company to earn better income.

Geobradley Hinchcliffe works for Shoebooks, premium provider of accounting software solutions for SME businesses in Australia. Check out Shoebooks business accounting software and experience the advantage of our bookkeeping accounting services for Australian businesses. Shoebooks is located at Unit 12, 118 Church Street, Hawthorn Victoria 3122, Australia. Call Shoebooks at +613-9818-1515.