Financial Accounting – Meaning And Importance Of Financial Accounting

Accounting is a subject which plays an important role in the efficient management and operation of every business. In different business, accounting books are maintained essentially, so that, all types of business transactions may be recorded properly. In the absence of accounting, it becomes difficult for the different types of internal and external parties to get information and to take decisions. In this way, it can be said that “Accounting is the language of business” because the main function of language is to help in communication and accounting also communicates the required information to the various parties of the business. Thus, accounting is important and beneficial for a business firm in the following ways:

Importance Of Financial Accounting

(1) Knowledge of Financial Position – An important objective of accounting is to know the financial position of the business. In order to fulfill this objective, balance sheet is prepared at the end of the year in which total assets and liabilities are recorded. Thus, accounting is helpful in providing the knowledge about the financial position of the business.

(2) Helpful in Raising Loan – The financial statements of business such as profit and loss account as well as balance sheet are helpful in raising loans. Every financial institution wants to know about the financial statements of the business. If proper books of accounts are maintained in the business, then it becomes easy to raise loan. On the contrary, if proper accounting books are not maintained in the business, then it becomes difficult to raise loan.

(3) Proof in Court – The accounting books maintained by business can be presented as proof in the court in case of any dispute because these are supported by the authenticated documents. Hence, accepted by the court as a firm evidence.

(4) Helpful in Comparative Study – It is very helpful in comparative study because under it, all transactions related to different periods are recorded properly. On the basis of these, future decisions can be taken. For example, a business firm can know how much increase or decrease has been occurred in income and expenditure by comparing the income and expenditure accounts of different periods.

(5) Useful for Other Parties – Many parties are interested to know about the financial statements of the business. Accounting provides useful information to all these parties. The usefulness of accounting for these parties has been explained here under:

  • For Management: Managers require various important information for efficient operation of business activities which are provided by the accounting. For example, accounting information is required for making plans, taking decisions, controlling the business, etc. which may be provided through accounting.
  • For Investors : Investor is the person who has invested the money in business. Thus, he wants to know whether the money invested by him is safe or not. Therefore, he is interested to know the financial position of business and on these basis, he takes the decision whether he should invest further in the firm or not.
  • For Creditors : Creditors are also interested to know the financial records of business at the end of accounting period because on these basis, they can estimate whether they will receive their money on due date or not.
  • For Lenders and Bankers: The lenders and bankers want to know the financial position of business before granting loans. If they are fully satisfied with the financial position of business, then the a business gets loan easily but it is possible only when proper records are maintained in the business.

Therefore, it is clear from above given study that the base for the success of a business is efficient and proper accounting system. Accounting is necessary for the efficient operation of business activities, whether the business is small or big.

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