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There are multiple transactions that take place during the year therefore, it is important to have a record of those transactions. Financial accounting helps internal and external stakeholders make better business decisions. Without financial accounting, decision-making can have a negative impact on the company’s performance. Here’s why the importance of financial accounting cannot be neglected.
Maintaining Financial Transactions
Every business needs to keep a record of the transactions it makes irrespective of its volume. Accounting uses a double entry system which means there are always two accounting entries for a transaction. A double entry system records both sides of a transaction which have two equal and opposite effects in at least two different accounts.
For example, if you purchase a machine in cash (for $10000), you debit machinery account and credit the cash account.
Get More Funding
When a bank issues a loan, it requires the financial statement to know whether the company is in a condition to repay the loan. Banks make sure that the company has repaid previous loans on time, their assets to liabilities ratio, and other important elements are considered before providing loans. Investors, on the other hand, look for what business the company is in, the profitability of the company, company’s competitors, company’s past earnings, what is the status of the company’s stock in the market, etc. Hence, financial accounting eases the process of getting loans and investments for your business.
Comparing Statements Between Two Financial Years
Financial statement of the current year can be compared with previous years. Small business owners can take a look at their figures for the year and identify the differences between the two. This helps to take better decisions for the future.
For example, you can compare the costs between the two financial years. If the costs of the current year are more, you need to determine ways to reduce the costs.
Fulfilling Tax Obligations
Maintaining books of accounts makes it easier to pay tax. The reason being, all bills, and other transactions are recorded and kept in one place. You do not need to make corrections at the last moment. Thus, an organized Balance Sheet, Cash Flow Statement and Profit and Loss Statement can benefit in planning tax returns.
Planning for the Future
Financial statements help to know where the company stands currently in terms of profitability. For example, reserves and surplus account tell you how much funds are available with the company. This helps you to know whether the company has sufficient funds to expand or diversify. Hence, financial accounting helps in making decisions for the future.
There are many more reasons why financial accounting is important, these are just a few. It is advisable to consider taking professional help if you have any doubts regarding your financial accounts or need any accounting tips to help you maintain your books. Financial accounting is a must for the smooth functioning of your business. You need to maintain the right books and make sure that the accounting is up to date.