What is accounting?

Accounting is an activity in which money transactions are recorded, summarised and analysed so as to produce information for a variety of purposes.

These purposes include but not limited to:

Accounting is a discipline that enables manager to be fully informed about the financial position of the business when making business decisions. Imagine making decisions about borrowing money but not knowing whether the business can afford to make loan repayments, or hiring staff without knowing whether the business can afford to pay their wages.

Good accounting procedure enables business managers to keep track of what is happening to the business in terms of money, debts, inventory and other assets. Without the discipline of accounting, the business will likely suffer losses in the form of customers who never pay their accounts, theft of money and goods by staff, and an inability of the business to pay bills on time.

Accounting discipline enables the manager to work out which business activities are more profitable. For example, the business manager needs to know which products or services are more profitable to sell, or how the individual sections of the business are performing. Thus the business manager can divert more resources into activities that make a profit and discontinue busines activities that make a loss.

All businesses must follow laws and regulations imposed by governments at Federal, State and/or Municipal level. Of greatest importance, a business must satisfy all reporting obligations to the Tax Office. Businesses must also comply with laws regarding auditing. When a business has poor accounting processes it will, sooner or later, be unable to discharge its legal obligations.

Accounting is therefore a vital and necessary process for the business. Poor accounting processes most often spells financial disaster.

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