Accounting basically tells you whether you are making profit or in a loss. Now the question arises how would you know?
Simple by maintaining business reports, organizing records and financial information. When you know about your financial situation like cash flows, current value of assets and liabilities then you can easily make decisions for your betterment.
For eg: Suppose a firm wants to invest in an asset but without any information of the profit or capital they can’t invest. Here the use of accounting helps in making a decision. So, should I invest or not?
The answer is yes by preparing a Profit or Loss statement which helps you to decide whether you want to invest or not. So, there are many uses of accounting which can help you in many areas in your life.
What are the primary uses of Accounting?
Before we start with the uses of accounting, can you tell me how these uses help?
Actually accounting plays a vital role in our organization but only if it operates correctly. When we record all business transactions with the correct method by analysing them then it works for our betterment. Now, let’s see how these uses help in our organization?
- Can Businessman remember all the past records?
Definitely No because there are many records regarding cash flows, profits, expenses etc. A businessman can not remember all the transactions and it is not possible even to remember. So, accounting helps to keep track of all the transactions and record them in a proper format. You can check the record any time and use them accordingly.
- Profit and Loss statement is must but why?
Every person wants to know what we are gaining or losing in our firm. Accounting helps in making profit and loss statements so that it can help by checking whether the firm is in profit or loss. There are some principles of accounting for making records which helps firms to calculate correctly.
- Determine the financial position of the business.
To know the meaning of a financial statement firstly you should know the terms like assets and liabilities. Assets means all sources and liabilities means all payable amounts of business. When you know about the actual financial position of your firm then you are able to make decisions about what is right for your firm. In every firm there is a particular date of making records for the whole year so that it is to make budgets for the next preceding year.
- Correct estimation of Tax
Do you know which type of tax a businessman has to pay? No, I tell you there are so many taxes a businessman have to pay like:
- Income tax
- Sale tax
- Property tax
- Excise duty
- Import duty
- Custom duty
You can see according to the business different types of tax have to pay but if a firm estimates correctly after then he can pay. For that a businessman has to record correctly all his income, production and sale in proper format. These all have been done with the help of accounting. If you don’t prepare records then the Assessing officer charges with his own calculations.
- Keep track of all your debtors and creditors for better accounting recorders.
Who are Debtors?
Debtors are the individual or a firm or any other entity that owes money to another entity. They become debtors at that point of time. Eg: A company who borrows money from a bank to invest in the company and becomes a debtor. They have to pay borrowed money back to the bank with interest.
Who is the Creditor?
Credit itself means to borrow money in the hope the person will pay it back (mainly it is a trust). Creditor is an individual or an entity that lends money to another party. Eg: A person wants a loan for his new car and the bank provided that loan so the bank is a creditor.
After knowing the terms of debtors and creditors now we discuss the use of accounting in it. With accounting, a businessman knows what amount is due from his debtors and what amount is payable to creditors. These all can be possible by maintaining the records properly.
- Do you know the actual sale price of your business?
After starting the business you invest a lot for it’s upbringing but if you don’t keep records of your investments then you won’t be able to know it’s actual price.
Now the question arises why should I know the sale price of my company?
Yes, you should know because if you want to sell your active business to another party then it’s easy to determine the actual value to sell due to your records which you have maintained properly.
What is the purpose of accounting?
The purpose of accounting is to maintain the report of financial information which include performance, financial position and cash flows. For that you have to prepare financial reports of cash flows on a daily basis to take a look at the performance at the end of the year. Now this information helps to decide how to manage the business and take decisions regarding profits and losses but with proper use of accounting.
- Record Transaction
- Monitor activity
- Control
- Management of the business
- Measurement of financial performance
In which areas accounting is used?
There are some areas that use accounting the most. These areas are:
- Medical
- Legal
- Architectural
- Engineering
- Accountancy
- Interior Decoration
- Technical Consultation
- Authorised Representative
- Film Artists
- Company Secretary
Wow, so many lines we have in accountancy. Don’t let them go from your hands. Make sure you are moving in the right direction with proper knowledge of your field. So, no one can beat you.
Conclusion
From the above we can conclude that accounting helps an enterprise to handle its day to day activities. It also helps in producing financial reports so that they can make economic decisions. Proper reporting and timely maintenance help to take important decisions on time. The use of accounting in the enterprise helps them to make decisions for the whole year.