Principles of Accounts

Importance of Accounting

Accounting plays an important role within the organisation
Accounting is important for a number of reasons:

Importance and role of accounting

It allows the business to record transactions for future reference
Provides information about whether a business is profitable or not
Provides information about the liquidity of the business
Provides information about the assets of the business
Provides information about the liability of the business
Provides information about the capital employed by the business
Provides information about the nature and amount of a business’s expenses
Provides information about a business’s cash flows
Provides quantitative information to various stakeholders including:
- The owners of the business
- Workers
- Potential Investors
- Bankers
- The Government
- Competitors
Allows various stakeholders to calculate the financial position of the business
Allows the government to calculate payable taxes
Helps the government in setting economic policy
Allows bankers to decided whether to lend or not lend money to a business
Allows management to calculate business trends e.g is profit increasing or decreasing, is the business growing or shrinking etc
Allows the business to produce financial statements:
- Statement of Financial Position/Balance Sheet
- Statement of Comprehensive Income/Income State
- Cash Flow Statement
- Statement of Changes in Capital
Aids management in making decisions
Allows competitors to gauge their own performance
Helps the business to plan and budget for the future
Helps the business in setting the prices of products
Helps in managing cash flows
Allows businesses to comply with the law (businesses are explicitly or implicitly required to keep books of accounts by the law)
Helps in filling financial statements with regulators where filling is required
Helps with courting investors