Importance of Financial Accounting to a Business

downloadThere are many things that are important to business. One of these is financial accounting. What is financial accounting? It is a concept where information about a business is communicated to interested parties, so that they can know about the financial health of the business. Most investors, based on the financial accounts, can consider the future prospects of the business. The most important factor, when discussing financial accounting, is its ability to provide information. This is vital in today’s business world. Without this information, investors cannot make informed decisions regarding the business world. Financial accounting is important. This essay will discuss the reasons for its importance.

All businesses, from the small ones to the large ones, record their business transactions. This is one of the uses of financial accounting. All small-business owners use this method of accounting to keep a record of the business activities. This is done in a ledger. Financial accounting uses the double-entry method. This is nothing new as every transaction affects to sides. Therefore, the double-entry system affects two accounts. For example, if a business owner purchases a vehicle for cash, he will record the vehicle account in the debit section while recording the cash outflow in the credit section. This provides a clear and methodological approach into the activities of the business. In this sense, financial accounting is extremely useful.

As mentioned above, information is communicated to outside parties through financial accounting. These are people who are not directly involved in the business, but are interested in how the business is functioning. This is done by providing the outside parties with financial statements of the business. These are the final results of how business transactions were conducted. What do outside parties do with the financial statements? They take them and compare the growth of the business and weigh it against their expectations of the business. This enables them to form an idea of how the business is progressing. Who are these outside parties? Most commonly, banks, leasing companies and suppliers are privy to financial statements of the company. They are always kept abreast of the financial situation of the business through these statements.

Financial accounting is also important for the communication of information for those within the business too. These are known as internal users. For example, the finance team or any employees who are interested in stocks and profit-sharing ventures peruse the financial information of the business. This is also important for business owners as they are able to share the information about the business’s strengths and weaknesses with their employees.

Financial accounting is also important as it provides small-business owners the ability to analyze their competitors and also to evaluate various investment opportunities. The rules of financial accounting are common for every business. Every business uses the same method of analysis and this makes it easier for business owners to compare different businesses against one another. As it is a standard method of analysis, small business owners are able to get a ratio of the businesses and use this ratio to compare competitors.
As is clear financial accounting is vital to a business. It is what enables outside sources, as well as, inside sources to find out clear and accurate information about a business.

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