Why is Financial Accounting Important to a Company?

Accounting | |

Financial accounting is very important for any size business. In fact, it is deemed mandatory that it has been referred to as the ‘language of business’ by financial experts. Although this is usually implemented in all business sizes, small business owners tend to overlook this aspect. If you understand financial accounting right down to its core, you will understand why it is imperative that all of the business owners understand this. Today, I am going to talk about the reasons why financial accounting is important to a company. Are you curious as to where you can get such services? Well, you can acquire them from accounting service companies in Malaysia.

Communicating Information Externally

Business owners can make use of financial accounting to help communicate their financial information to external parties that have a vested interest in the company. Organizations and individuals who make use of a company’s financial information (though they are not part of the company, per se) are referred to as ‘external users of financial statements’. Company owners can convey their business’ financial health to external uses via financial statements. Such statements are made by accountants by tracking and recording the company’s financial accounting transactions. The external users can then examine these financial statements and would then compare the data that they see from their pre-existing expectations and they can then form a decision whether or not to release funding or look for another company.

Recording Transactions

A service that is under the umbrella of financial accounting is bookkeeping, which happens to be one of the most important applications of accounting out there. This is characterized by tracking and recording the company’s financial transactions. Small business owners would track their transactions and would then place all of the relevant information inside the company’s ledgers. Keep in mind that financial accounting mainly uses the double-entry system which will represent the two sides of every transaction. For instance, if the company owner decides to buy new land for the expansion of the business, they would input debit to the land account to represent that the land has been acquired, and a credit to the cash account to signify the outflow of cash. This is especially useful for small business owners because it uses a methodological approach in describing the different activities of the business.

Analysis and Comparison

Business owners can utilize financial accounting to help them analyze their competitors and to also evaluate possible investment opportunities. All of the financial statements are standardized because they are governed by the GAAP, which means that business owners can compare it with competitors and see who has the competitive advantage. This is actually great as it helps to compare your successes against your competitors more standardized. Small business owners, for example, may use the financial ratios that are stipulated in the financial statements and compare them with their competitors or industry benchmarks. Although you can find important information regarding the financial status of the organization, just exercise caution since there are non financial measures that can also give some insights to a company’s function and health as well.