Businesses cannot be operated with a closed eye. Therefore, to ensure that the business numbers make sense, accounting information is prepared. What is the importance of accounting information? This article explains them.
Accurate financial records
The primary importance of accounting to businesses is accurate financial records. Accountants who value their work ensure the accuracy of financial reports. One way to achieve accuracy is through account reconciliations.
Also, schedules are prepared to track different accounts. The figures in the schedule are compared with those in the account. If they are the same, the accountant is assured of the accuracy of the financial statements.
An example is the depreciation schedule. The data in the schedule must correspond with that in the books of accounts. This data includes depreciation expenses, provisions for depreciation and the cost of non-current assets.
Information for decision making
Financial statements are prepared for users to make informed economic decisions. Matters such as investing in shares require reviewing the company's financials. If a company's management decides to enter new markets, it needs financial information to make such decisions.
Other areas where users may need to make decisions from accounting are:
- To buy and resell or make a product.
- Knowing of a business or capital investment is viable.
- Deciding on whether to continue a business venture or shut it down.
- To know if a business is earning profit or incurring losses.
- Knowledge of individuals who owe the company and those to whom the company is indebted.
This can be achieved when accountants prepare accurate financial reports. Why? Decisions made based on an accurate report may not go wrong.
Serving as financial gatekeepers
As financial gatekeepers, practising accountants and auditors ensure the integrity of financial information. They set up systems and policies. These are used to prevent fraud and errors in financial reports.
For example, accounting or ERP software is installed for an organisation. The accountant can improve the integrity of the system by posting error-free financial transactions.
Accountants and auditors may detect fraud. These are forwarded to management. When top management refuses to take action, it is the ethical duty of the accountant to report to a higher authority. An example of a higher authority is a regulatory body.
Providing a sustainability report
Accountants are charged with preparing the sustainability report for companies. Therefore, as the world becomes more aware of ESG (Environment, Social, and Governance), accountants will be at the forefront. Therefore, an accounting (or ESG) system will be created within an organisation to enable the preparation of sustainability reports.
Sourcing funds from investors and creditors
Accounting information is used to source funds from investors and creditors. The cash flow statement is a tool in achieving this. Creditors (including banks) want to know if the business can repay the loan borrowed. On the other hand, investors want to understand if the company can pay dividends as promised. Investors and creditors can be reassured by a good accounting information system.
To conclude, accounting information and its systems are useful to business owners, investors, and creditors. A good system helps reduce fraud and errors. Financial reports prepared from the system can be used to source funds and make informed decisions.