Why Do We Need Accounting?

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Companies of all sizes need to implement a streamlined accounting system in order to accurately record and report business transactions, keep track of invoices and reduce problems with tax authorities and the IRS. Accounting procedures are typically coordinated by a CPA or financial manager who is responsible for recording all incoming and outgoing transactions, maintaining consistent records and creating financial statements at the end of each financial period.

Significance

Accounting, also known as accountancy, is the measurement of financial resources and account information. This information is posted in various financial accounts and disclosed to decision makers and other parties in a specific format. Accountants typically adhere to the Generally Accepted Accounting Principles (GAAP) in order to report financial statements in a consistent manner and maintain clear and objective reporting practices throughout the organization.

Function

Accounting helps companies organize their most important business transactions and obtain reports about their cash flow, balances on key accounts, and their overall financial position at any given time. These are important elements of business regardless of a company's size, and can help resolve or reduce the risk of reporting inconsistencies to financial managers, investors and tax authorities. An well-implemented accounting system also makes it easier to access financial statements such as the Balance Sheet, Income Statement, Statement of Retained Earnings and Statement of Cash Flows.

Types

Financial accounting is the process of collecting financial information about a company and interpreting it for both private and public use. This type of accounting is typically undertaken by large companies and corporations that must share their financial statements with a number of different parties. Management accounting is the process of collecting financial information to be used within an organization; this type of accounting can be undertaken by companies of all sizes, and the reports and account information are shared with senior management, stakeholders and other parties who have a vested interest in the company’s operations. Tax accounting is a type of accounting designed around tax rules and regulations.

Benefits

In addition to keeping track of transactions, a well-implemented accounting systems may also be used to predict cash flow, maintain a budget and forecast revenue as part of a financial projection or analysis. Accountants who maintain accurate and consistent accounting records and financial statements make it easier for financial analysts and other members of an organization to interpret the data and use it for various purposes. A well-managed accounting system may also reduce the risk of fraud, financial errors and tax problems.

Effects

Companies that establish an accounting department or accounting system can prepare important financial statements each quarter and gain an objective view or "snapshot" of their financial situation. Accounting systems allow decision makers to make informed decisions for investments, purchases, sales and other financial operations involved in running a business.

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