How Accounting Plays an Important Role in Business Decision Making Process?

Post in Accounts

Why not study accounting and become a successful accountant?

To be an aspiring accountant it is important that you study the subject well and understand its importance.

Accounting is the subject that adopts a systematic rule of maintaining and recording of financial data of company. It is the best way to summarize the data and make the financial statement for the organization.

To make better financial decision in a business it is necessary to maintain accountancy. Some of the key objectives of accounting are:

  • Helps in keeping records:

The main role of accounting is to have systematic and accurate information where all the records would be maintain. The transaction of the business once recorded helps to retrieve data whenever necessary. You need to understand that the financial record would actually become the backbone of any business.

  • Planning:

The organization whenever needs to plan about the allocation of the resources which can fulfil the needs in the future. The effective way can make different forms of budgets. Budgeting can be an important component of any managerial accounting. Budgeting can also help in proper coordination of segments of organization.

  • Better decision making:

Accounting can also allow the managers to take better decisions and develop the different policies which can make organizational processes highly efficient. The management decisions would actually depend on different accounting information related to the prices charged for the services and products to get maximum profit.

  • Evaluate performance:

Accountancy is the subject that would help to understand the performance level of the business by evaluating and summarizing the financial information. It is really very important for the organization to measure the performance of the organization while comparing the past performance against the competitors.

What is the position of your business? Do you have any idea? How will you be able to understand the position?

Through accounting it is certainly possible to know which the business opportunity is and where you should invest. The business can even make decision whether to continue the product or not in the market based on its performance. The financial statement will be able to show you the financial positions of any business.

The financial position will be able to show the present situation of any business. Knowing the capital and how much to invest in the business.

The financial position is determined through its profit and loss. The debt that the business owes will also help to analyse the position of the business.

It’s time to increase the productivity of your business!

Firstly, you need to understand the basics of accounting. So, make use of the software which is specifically designed for the business and can help in acquiring less time on such activities. The accounting software has the ability to calculate the handling and tax costs automatically. A sales invoice can help to track all the information data related to accounting.

The effective accounting software will be able to create various invoices at the end of the years. There are many business activities which are developed in a single year. Through accounting data it is convenient to understand the business and evaluate the dynamics from various angles.

The accounting will give the chance to understand the cost of employee and analyse the profitability of products. Accounting report can also give an idea whether the product is generating profit or not.

“Accounting is said to be the best way through which you can actually understand the cost incurred by the company.”

Role of accounting in business

  • Management handling

With the help of management accounting it is possible to acquire different information and allows in evaluating performance of company. Selling of merchandize may give you the feeling of high performance, but maintaining the accounts will definitely help to get to see the other side of the coin. In case the cost price is high, then it would reduce the profits. Accounting will be able to give detailed information about the finances and learn about how to use the money.

  • Having total control on accounts

When your company starts to grow, it becomes difficult to keep proper track of the money. So to make things easier for the enterprise, it is essential that the company accounts are well maintained.

The good accountant will be eligible for identifying the problems in an organization. In case there is any problem identified, than the accountant will be responsible for establishing the policies which can reduce the fraudulent activity.

  • Government and accounting

You need to pay taxes when you are running an organization. You need to pay the tax on business income. The social security on the paychecks on the employees and other tax bills are taken care of.

The good accountant will talk about the different forms of pay which will be associated with the business. You need to fulfil the payment requirements of business and to do it efficiently maintaining the accountancy record is important.

It is the responsibility of the lenders and banks to understand the financial condition of organization based on the loans granted. The revenue earning capacity will help to determine the financial status of the business.

Without the proper accounting system it is important to understand the situation of the organization. Every business should record the past transactions that would reflect the taxes paid and assets, liabilities and the profits.

Through the help of financial statement, it is possible to understand the fate of stake holders. Accounts would actually act as representation to stakeholders and would impact the financial position of the company. The budget would enable to understand the strategies of the business and help to save money for expansion.

The accounting will actually take care of the maintenance of records which would form the planning budgets. The main objective of any business is to generate profits. The taxes related to income tax should be paid on mandatory terms. So, to understand the profit amount it is important to maintain accountancy within organization.

Business owners need to make use of accounting

Without managing the accounting system in the business, the organization would be directionless. The day-to-day activities of the business should help to record the income and expenses. Small as well as big businesses every organization needs to maintain the accounts to understand the financial position of the business.

While discussing about the accounting information, you must know that it is accessible to many people that includes creditors, business managers, owners, investors etc. The business man has the opportunity to make use of the financial statement and grasp the necessary information which would help to take important business decisions.

Making proper use of the balance sheet can surely help to take fruitful decision. So as a business owner why don’t you scrutinize the financial position and check out the liquidity and solvency status of your business?

The proper use of the financial ratios that includes working capital ratio and the debt to equity ratio should be well-checked. Now, you must be worried about what is meant by working capital ratio?

It allows the user to understand the position of the company and whether the organization has the ability to meet up with its current obligations related to payroll and trade payables. Next comes debt to equity ratio and this is related to the financial leverage of the company which is skilfully calculated by diving the total liabilities by equity.

Don’t you think accounting is vital in business decision making process?

The main objective of accounting is to offer with proper financial information to stakeholders, investors, creditors and the management team. Through accounting process it is convenient to summarize and understand the overall activities of the company that would enable the management to take major decisions that can help in growth of business.

For all the future manages, remember you will be solely responsible for generating accurate and timely financial data which would enable in proper decision making process. The accountants are the one who can surely produce the information.

When it comes to accounting process, make sure that you have the ability to collect the necessary data and produce different types of reports. The accountant has to interpret the actual facts of the report and come up with detailed understanding so that proper solution to problem is provided.

What are the two different forms of accounting? Actually accounting is categorized under management accounting and financial accounting.

Management accounting allows the business to run efficiently, while the financial accounting gives opportunity to make reports and ensure how well it can run.

Make use of accounting data for decision making

Running the business would demand acquiring of the accurate data which would speak about the assets, liabilities of the company, profit and loss position. Accounting comes up with the most crucial information and it plays an important role while analysing the viability of investments.

While making proper investment it is necessary to make thorough analysis of the costs and also forecast the future cash flows. There are certain factors that would help to understand the hurdles and also plan the return on investment.

Through income statement it is possible for the business owners to understand the performance of the company. It also helps to determine the profitability aspect of business for specific time period. In case you are running a company, then it is certain that you would check the financial aspects and understand the performance of funds.

The income statement of a company would reflect the income and profit which would allow generating the business operation. It is the best way through which you can get a thorough knowledge on the expenses which would help business to measure its spending. The statement is also helpful in computing income tax that should be paid to government.

Cash is an important asset of company and so to get a clear picture of the cash, it is necessary to maintain the accounting system of company.

The cash flow statement will enable users to get important information related to the inflow and outflow of the funds within specific time period.

It also helps to understand the different sources from where the inflows take place and the funds are utilized. The cash flow actually involves the financing, operating and investing activities. The financial statement will actually assist the owner to take proper decision and have a planning which would match with the inflows and outflows to maintain liquidity in the business.

Type of accounting that can fulfil the business needs

  • Tracking down the income and expenditure

The business would demand filling the tax forms which would be on gross revenue and the net income. The state as well as the local excise would calculate as the percentage of revenue. While calculating the net profit related to income tax, it is important to divide the expenditure that includes the utilities, payroll, auto expenses and rent.

  • Payroll accounting

It is necessary to calculate the amount which should be paid to every employee based on their salary and working hours. The business is in need of the comprehensive and updated payroll accounting that would allow in keeping track of the numbers. It is important to pay all the payroll taxes and file the reports whenever it is due.

  • Cash flow accounting

The accounting system would necessarily include different tools which help in tracking of the availability of cash. In case you are using the cash based system then it is an effective way to understand the inflow and outflow of cash. If you are using the accrual system, then it helps to record the sale as revenue.

In order to understand the business, it is important to recruit someone who possesses the skills that is necessary for managing financial aspects of the business. Businesses involve different parts and each of them is inter-related. So you need to know the difference between business accounting and managerial accounting.

It is vital to understand the business competition, the needs and want of customers to stay ahead in the market and the business processes which would help to maximize the efficiency. Therefore, step-by-step strategy should be adopted to enjoy profitability of business.

Author Bio:

Evelyn W. Minnick is a Harvard university degree holder who has 6 years of experience in the field of accounting. The ability to understand the need of students and delivering knowledge accordingly has contributed in the popularity of the tutor in The step-by-step explanation of the topic gives clarity on subject.