The Importance and Functions of Accounting and Audit in Today’s Business

If you have been in business for a while, you may recognize the functions and importance of accounting and audit. Perhaps there will be a couple of functions here that you have not thought about or taken advantage of, however. Two sections of this article will cover the purposes of accounting, importance, and usefulnessⁱ.

Purposes of Accounting

A record of transactions – this function of accounting can be referred to as bookkeeping as well, as its primary function is to record all business financial transactions, maintain the accuracy of the records, and give them a format and reporting functionality that makes them useful.
Budgeting and planning – business owners gain valuable insight from accounting records that is critical to budgeting and planning business activities. Payroll, inventory, cost of goods, production costs, marketing, and every other function of a business is dependent for efficiency on good budgeting and planning. Reporting of those costs and income is crucial to the tasks.
Decision-making – only by knowing the costs of labor, sales, and production can business owners make intelligent decisions about pricing and future marketing and advertising. This includes forecasting cash flow and setting up borrowing or other financing for shortfalls.
Financial position and financing – as previously stated, financial planning and possible funding decisions are dependent upon accurate accounting records and reporting. Anticipating financial needs, the business owner can investigate funding resources if needed. Financial reporting is also necessary to give lenders an accurate financial picture of the business for lending decisions.
Control issues – only accurate accounting records coupled with checks for abnormalities can uncover theft or other irregularities that damage cash flow and profitability. Internal controls based on accurate reporting are critical.
Legal requirements – the law requires accurate financial reporting, including for tax jurisdictions. Public companies have stricter requirements for reporting to management and shareholders.

Usefulness and Importance

Accounting is useful for:

Cash flow tracking – the business can only survive if cash flow is maintained, shortfalls are predictable, and strategies developed to maintain cash flow.
Cost understanding and management – businesses have fixed costs and variable costs. It is important to know the difference, record them differently, and to use reporting from records to manage both.
Overall business health – for ownership and for concerned third parties, accounting provides a history and current snapshot of the financial health of the business. Only by comparison of accounting periods can a business catch variations that may point to problems and cash flow issues.
Detecting criminality – accounting and its reports help a business to catch abnormalities that can point to internal or external theft, embezzlement, or other fraudulent activities that impact costs or sales.
Audit preparation – actually, good accounting can help in preventing audits, but when they arrive, the accuracy and completeness of accounting records helps in weathering an audit.
Getting funding – if in the normal course of business or for emergencies, the business must borrow money, lenders will want to examine the financial reports and records. A lender will be more likely to provide funding if they find accurate and organized records.
Growth planning – planning for expansion or growth is facilitated through an understanding of how it will impact cash flow and other areas of the business. Accounting records and reports help in formulating a business plan and future growth or expansion.

If you already knew all of this but read it anyway, you probably got some new thoughts on improving your system, adding outside accounting professionals, or just doing an internal audit of your processes for improvement. If you did not know all this information, you have a firm foundation now on which to set up your accounting systems.

i Why is Accounting Important, Freshbooks.com