Accounting means managing monetary transactions and it is important for everyone like business, organization, individual etc. because everyone is involved in monetary transactions in some way or the other like selling, buying, paying, receiving, saving etc. There are many concepts given in accounting which help in understanding and using accounting in a better way.
Everyone is using accounting knowingly or unknowingly but some are doing it well and some are doing it poorly. The better the use of accounting, the better will be the result; similarly, the worse the use of accounting, the worse will be the result.
Table of Contents
Importance of Accounting
Following are the importance of accounting:
1. To Manage Transactions:
There are a lot of transactions done in business which need to be managed appropriately because without managing the transactions the outcome of that transaction will not be known. For example, the main objective of business is to earn profit and without managing the economic transactions it will not be known how much profit or loss is being made in the business, it will be known only when all the transactions are managed systematically.
2. For Evidence:
Accounting has evidentiary value because it is valid before the law, but some documents of accounting have more evidentiary value and some documents have less evidentiary value. One can take legal action on the basis of accounting documents, but those documents must be valid.
3. To Communicate Results:
Business is an economic activity and economic activity is defined by numbers and accounting is completely based on numbers that is why accounting tells the result of the business. Accounting provides different types of reports such as ledger account, cash flow statement, manufacturing account, trading account, profit and loss account, balance sheet, etc. With the help of these reports one can get better information about the business.
4. To Planning:
Accounting provides data for planning because planning is made on the basis of data. The more accurate data is used, the more accurate planning can be made. Planning means thinking before doing the work, what to do, why to do, when to do, how to do, and who will do, etc.
5. To Prevent Fraud:
Accounting helps in preventing fraud as all the transactions are recorded systematically in accounting and it contains many types of reports with the help of which fraud can be detected.
Many transactions take place every day in business which increases the possibility of fraud. The larger the business, the greater the possibility of fraud and the smaller the business, the lesser the possibility of fraud.
6. For Funding:
Money is required to run a business because business is an economic activity and economic activity means activity related to money or equivalent to money, that is why money is called the blood of business. Accounting helps in taking money from investors and lenders because investors and lenders give money on the basis of accounting reports.
7. For Tax Calculation:
Every eligible person is required to pay taxes to the government because the government depends on taxes. Accounting helps in calculating tax because accounting provides various reports which helps in calculating tax.
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QNA/FAQ
Q1. Is accounting used to manage transactions?
Ans: Yes, accounting is used to manage transactions because accounting means to manage the economic transactions of the business and in it, all the economic transactions are recorded systematically.
Q2. How does accounting help prevent fraud?
Ans: In accounting, all transactions are systematically recorded, and various types of reports are prepared with the help of which frauds can be detected.
Q3. Does the lender check accounting reports while giving loan?
Ans: Yes, lenders check the accounting reports while giving loans because the loan limit, tenure and type etc. are determined only after checking and reviewing the accounting reports.
Q4. How does accounting help in planning?
Ans: Accounting provides data for planning because planning is made on the basis of data. The more accurate data is used, the more accurate planning can be made.
Q5. Write the importance of accounting.
Ans: Following are the importance of accounting:
1. To Manage Transactions
2. For Evidence
3. To Communicate Results
4. To Planning
5. To Prevent Fraud
6. For Funding
7. For Tax Calculation
