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Importance of Accounting for enterprises

For smooth operations of any business organisation or enterprise, there are many core activities that are done on a regular basis. These are the quintessential actions that are needed to be done for unhampered flow of day to day business. Accounting is one of the core activities. Whether the company is big or small, it is important to keep track of every single transaction. For purposes of bookkeeping, audits, payroll to other everyday business operations, there are many aspects and activities that needs to be done. Wellorganised and proper financial records will ensure efficient business operations.

To ensure sustainability and growth of a business, accounting is an effective tool that allows to review
the financial performance and based on that some informed decisions can be taken for guiding the
business into a better future.

Basic elements of accounting which aids an enterprise

Enterprise activities and operations are all about numbers in the end when it comes to sustain in the competitive market and flourish. Accounting is a vital and important activity because it provides quantitative information about all stakeholders and also to them who helps in taking informed economic decisions. The stakeholders include management, regulators, financiers, suppliers, government, investors etc. For both short and long-term business decisions, and steering the direction of the enterprise towards the objectives and amending them according to the numbers are aspects which revolve around accounting. Financial statement is one of the key elements to this and it includes several constituent statements like –

Balance Sheets –  Balance sheets are statements that display the financial position of an enterprise. It is time specific and shows the closing balance of various assets and liabilities on a particular date and goes through changes every day. It also indicates the capital which is the excess assets over liabilities of an enterprise.

Income Statement (Profit & Loss Account) – Income statements indicate the balance left after calculating
the net profit generated and net loss incurred by an enterprise during a particular time period.

Cash Flow Statement – This type of statement indicates the balance sheet and income statements in cash equivalence. Simply put, it indicates the cash inflow and outflow among the various financial activities of an enterprise.

A combination of these three types of statements make the overall financial statements which is a
requirement for all stakeholders.

The way in which accounting helps a business or enterprise

Accounting provides the clarity and compliance and aids the business with the foundation for conducting
business in an efficient way. It helps in many ways –

Evaluating business performance

The output from operations is necessary to measure the performance of how the business is doing. The financial statement is also necessary to be reflected upon. The numerous balance sheets are required to calculate the ratio of profit and loss and other ratios like turnover ratio, debt-equity ratio, current ratio etc. A comparison is done with the projected or targeted figures according to the goals and objectives, and also with previous performance indicators and outputs to find out strong and weak areas to work on.

Filing financial statements with specified parameters –

Financial statements with specified parameters like tax return filings, regulators, and stock exchanges(for listed entities) are required to be produced by the enterprises. Financial information along with statements are required for both direct and indirect tax filling.

Monitoring cash flow

Both the capital and cash are needed to be constantly monitored for the upkeep of the enterprise in the
designated way and that can only be properly done through a rigorous accounting system.

Making budget and future plans and projections

The year-end budget needs to be reviewed in comparison to the performance of the enterprise, the expected outcome and the remainder between them. For the future, forecasting needs to be done to be able to properly prepare and engage strategies and quantitative projections help a lot in that regard. Budget preparation and planning also rely heavily on the accounting system and the data it produces.

Adhering to compliance and regulation

All kinds of regulations and compliance require a clean and clear financial record and transaction showcasing. Accounting ensures that all of these activities are properly streamlined. The paying off of liabilities are in proper arrangement and follows a timeline which also includes income tax, VAT, provident fund, sales tax, and pension fund. Maintaining payment at the right time and not missing the deadline is a prerequisite for enterprises to be statutory compliant.

Assisting in every day operations

When all the transactions are recorded and all the quantitative data are sorted and well-arranged, it helps to produce various kinds of quantitative and qualitative reports as per need according to any business situation.

All the above-discussed points can be redirected to a common trait among all is that accounting is at the
heart of all activity and it is imperative to the operations of a healthy and sustaining business, which is
compliant with all regulations and is going along a path of continuous growth and flourish. This applies
to all kinds of business, private or public, big or small.

 

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