Even though most of the day to day accounting activities in our everyday life often go unnoticed, the role of accounting cannot be underestimated. Accounting is an essential part of living; it might metamorphose but the core principles remain the same.
The critical role that accounting plays in all areas of life is evident everywhere, it is one of the first activities you engage in when you open your eyes to start the day. If you think through your day at whatever time, you might just uncover basic accounting principles that you have invoked to get through time.
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This article will offer you an insight into the fundamental importance of accounting at two very important dynamics of life; personal and business. If your accounting needs require you to apply textbook principle, it might be the perfect opportunity for using the services of an online accounting tutor to help you through your college assignments.
Importance in Your Personal Life
Imagine a simple process like cooking that we engage in every day. Whether using a cookbook or not, the first step is always to check whether all the supplies or possible substitutes are available. Ten follows the step of making a list of all the items that must be purchased to complete the list of ingredients required. Interestingly, everything after that to the moment you place your food on the table involves one accounting principle or the other. Here is a recap;
- Summarizing – by checking for availability of ingredients, you categorized all the requirements into two large groups; to buy and not to buy.
- Analyzing – by checking if your change is correct or your receipt reflects only the items in your shopping bag, you carried out a hurried investigation of a fair purchase,
- Reporting – by placing all the requirements on the table ready to start your cooking, you presented a confirmed report of a solution to the problem at hand.
All life’s choices whether major or minor are based on accounting making it an inarguably core aspect of everyone’s life. Nevertheless, it is important to acknowledge the important of financial resources in enhancing the quality of life. Here are some accounting models that will help you to earn/save money;
With a proper plan of how money is going to be spent, wastage of resources is significantly reduced. For an individual, the process of budgeting need not be complex; just divide draw a line that separates your journal into two vertical sections. List all your incomes on one side and all your expenses on the other. The best way to create a working budget is to ensure that the two sides balance – make substitutions and omissions on the expenses side to make this to happen.
Apart from keeping expenses under check, budgeting allows an individual to accommodate long term financial plans such as retirement or education.
Aligning Your Expenses and Income to the Budget
It is one thing to draw a budget and a totally different thing following up with that plan; this is where most people report challenges. Tracking expenses is a conscious effort that thrives on consistency. Every time you earn some money or spend it, it is important to make a note of it for accurate budgeting.
Saving For Later Days
Making a budget and recording all your transactions to keep within your means is nothing if you do not spare some money to keep aside as savings. Most people will argue that their income is too little and they cannot afford to save. If you can relate to this challenge, consider setting aside your saving before you start drawing your budget. The deficit will inspire you to either work harder for more income or cut down on the avenues where your money as spent.
With some money set aside, one has a cushion against unexpected expenses and emergencies. Furthermore, the discipline to save diminishes your chances of falling into a financial crisis.
Investing Your Money
Growing your net worth is another important role of accounting. You will obviously need to identify the different investment vehicles available to you before you can settle on a few that resonate with your goals. The most important component about investing is that it grows out of saving. Since you have managed to allocate a portion of your income to savings, it is a good to put this money where it is going to grow. Some people prefer to keep a personal eye on their finances and hence pursue business; the other lot chooses passive channels such as forex trading, bonds, stocks, etc. The more investment options you choose to go after, the more accounting will be required of you. It is alright to need help with your personal accounting. Luckily, the internet has online accounting tutors you can hire.
Importance in a Business
Measuring the financial performance of any business is impossible without proper accounting structures. Apart from the basic monitoring of expenditure versus income, business accounting facilitates statutory compliance and informs business decisions from management. In business accounting, financial records are used to come up with;
- The income statement – provides a breakdown of loss and profit
- The balance sheet – offers a financial autopsy as at a certain date
- The cash flow statement – the bridge between balance sheet and income statement that details the money sources and expenses for a given period
Regardless of the size of business, clear financial records are the key to its survival. How important is accounting to a business?
Evaluates Business Performance
The financial position of any business as well as its performance against set targets can be established from financial records. This can however only work if the process of recording financial entries is consistent and accurate. Business financial records not only offer a mirror through which expenses can be tracked but also help in setting price points base on gross margin achieved.
A track record of accounting in business is going to reveal areas that require improvement or new strategies. Used in comparison to records and budgets from past financial periods, business accounting can help with resource optimization. Fund accounting would come in handy to help in record keeping.
Ensures Statutory Compliance
The laws governing business functions are different depending on the country or region in which your business will be operating. A proper system of accounting for your business means that both inward and outward flow of cash is transparent. This ensures that business liabilities like VAT, pension fund remittances, income tax, and sales tax are appropriately catered for.
Budgeting and Future Planning
By using financial tools to understand the level of stability of a business, an ailing business can be salvaged early while a well-performing entity can be scaled. Making projections on the future plans of a business often depends on prevailing market trends. Based on this information, budgeting comes along to establish income streams and plan on expenditure.
With a well-structured process of accounting for all business transactions, all manner of financial data can be used to create appropriate reports needed for accomplishing future plans. During the process of budgeting and future planning ensure that accounting ethics are practiced for smooth operations
Facilitates Filing of Financial Statements
It is a requirement of the Registrar of Companies that all businesses file financial statements with the institution. For companies listed on the stock exchange, there is an additional requirement to file their reports with the securities exchange. Needless to say, it is of fundamental importance to declare financial performance to a governing body for purposes of filing taxes.
How Accounting Relates To Different Activities
It is strange and probably something that most people will relate to but the simple action of checking the balance of your credit card or confirming the amount of charge pending on your debit card is accounting. In many instances where accounting is applied, the process is not this passive.
In most households today, major spending takes place under the backing of a budget. The frequency of budgeting at the house level depends on trends and family traditions. By aligning purchases to marketing trends in the form of discounts and seasonal buys, most people practice accounting without realizing it.
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