Why is Accounting Crucial in Business?

Jul 13, 2021 • By Frances Harriet Lim

Business owners never fail to hire at least one accountant in their company, no matter what type of business. Only accountants are capable of understanding and performing necessary accounting processes within the company.


Accounting, as defined by the American Accounting Association (AAA), is “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of information”. With this, accounting is often called “the language of business” since it allows various users of the information to make decisions related to a particular company. There are two main types of users, namely: internal and external users. Internal users are usually those within the organization such as the management and employees who use the information to help improve the performance of the company. On the other hand, external users are those outside the company such as its customers, creditors, or investors; who use information in order to assess the financial condition of a particular company and make relevant decisions in relation to the acquired information. 

We do have to take note that accounting is a broad term and that there are various types of accounting that a business can be involved with at the same time. These are:


  • Financial Accounting

This type of accounting is mainly involved with recording financial transactions and information in order to compile it into financial reports. Financial accounting is highly dependent on accounting standards and accounting frameworks such as the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP).


  • Management Accounting

There is a thin line between financial accounting and management accounting. Both are concerned with identifying, measuring, analyzing, and interpreting information. However, their major difference is that financial accounting is focused on relaying the information to external users while management accounting is concerned with communicating the information to internal users, or particularly the management.


  • Cost Accounting

Cost accounting is concerned with recording, analyzing, and reporting the entity’s costs that are related to a particular product or service. It helps businesses to allocate costs properly and determine the proper price of a particular product or service.


  • Tax Accounting

It is focused on the processes involved to prepare the necessary tax returns and payments that a company has to comply with.


  • Auditing

Auditing is involved with the examination of the various financial statement assertions made by a company. This helps the company identify any errors or frauds that are existing in the financial statements.


Considering that a business invests money, time, and effort in applying these various types of accounting into their business operations, it is expected that it would be beneficial to the business. The following are examples of the contributions of accounting to a company:


1.Provides financial information.

Financial accounting generates financial reports which contain relevant information such as how much the company earns, how much its assets and liabilities amount to, and more. It gives the business owners an idea of how their business is performing.


2. Helps comply with legal requirements

Running a business means that one needs to comply with the legal requirements, such as filing tax returns and paying taxes. With the help of tax accounting, business owners can easily comply with these requirements.


3.Helps make important decisions.

As accounting provides managers with relevant financial information, the managers can use it in making important business decisions. Management accounting is specifically designed to aid managers with accounting-related decisions which help improve the financial performance of the company.


4. Helps identify improvements within the organization.

As auditing helps the company identify any frauds or errors within the company, the management can easily seek methods on how to improve the aspects that they are lacking.


Accounting might seem complicated and just focus on numbers in the business. However, proper guidance, allows the business to improve its current operations and develop methods on how to grow and develop as a business. Hence, business owners should carefully choose their accountants and accounting software to use.


    Leave a comment