Accounting can be described as a quantitative method used to assess the financial position of an individual and/or business at a given point in time. On the basis of this definition, we can deduce that accounting is considerably important not only in businesses but also in the lives of individuals.
In this article, we will look into the basics of accounting and how important it is in today’s society.
Let’s begin by dissecting the core concept of accounting and the reason why it is in place. Accounting is used to quantify the assets, liabilities, investments, and cash flow of a particular entity. This is done using an established legal framework that comprises specific guidelines that are easy to understand and follow.
Collectively, the fundamental principles of accounting are referred to as generally accepted accounting principles (GAAP). In essence, GAAP guides accounting professionals in the generation of financial reports.
All entities have legal obligations to report financial information on an annual basis. The same is seen in enterprises all over the world, with variations only being seen in the type of principles in place to guide the bookkeeping process.
Accounting is required to ensure that all economic activities within the boundaries of a nation are being processed in a legal manner without gaps. This is essential for nations with specific tax provisions that must be paid annually (i.e., income tax). Without accounting, it is impossible for the government to assess discrepancies and potential financial misconduct among its citizens.
Take for example an individual who earns $100,000 a year but only reports earnings of $80,000. Without the provision of sound and accurate financial reports, the government would have minimal leverage to track down this type of discrepancy.
Accounting can be broken down into “accounting areas,” some of which are enumerated below. These areas have different focuses and deal with different factors.
- Financial accounting
- Management accounting
- Cost accounting
- Tax accounting
- Government accounting
- Healthcare accounting
Types of Reports
Several financial reports are created with the aid of accounting principles. These reports in turn help entities in assessing their financial health and in making important business decisions.
- Balance Sheets
- Income Statements
- Retained Equity
- Assets and Liabilities Report
- Statement of Profit and Loss
Value of Accounting
Given the above descriptions, what could be the significance of accounting as a whole? Accounting is in place to ensure equality and fairness in financial reporting. Through the standardised processes inherent in accounting, it prevents the exploitation of existing financial systems.
Accounting plays an integral role even in the simplest financial activity of paying one’s monthly bills. Without this standardised process, entities will not have access to financial information that is crucial in decision making. With accounting’s many functions, it has clearly established itself as the core mechanism that drives society and its economic activities over time.