Anuj Aggarwal, Vice President and CFO,
Kids ask lot of questions in their quest to grow and understand the world and we should promote this habit among kids for their overall growth. I’m not an exception to this and my son used to ask me many questions during his growing age. One of the questions that he asked during his childhood has stuck to me till now and the question was about my job. During his early days he did not understand about accounting and he asked me what I do in office from morning to evening? To answer his question in simple terms, I told him that I take care of finances and do manage accounts at office. To this he simply smiled and got back to me, what is so great in that, Mom also does that for our house and why do companies need professionals like us to do that and further for that why do we spend so much time in office and paid high for that job which is quite simple. So it is very pertinent to address this question that what is accounting and why business need accounting ?
Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies and tax collection entities. Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees’ at large companies.
Now let’s see why we need accounting in business. All of us know that lot of businesses fail due to the simple fact that either they are not able to do proper accounting or they are not able to understand the accounting. Examples of businesses failing due to improper accounting are many like Enron, Satyam etc. So we need accounting in enterprises due to the following:
To measure current progress: It is famously said that what is measured/monitored is done. So in business also we need to have continuous monitoring to understand the direction in which business is moving, which part of business is doing well, which geography is better than other and vice versa. It is the accountants who report to management the same by their various analysis and diagnostic reports. Now these diagnostics or analyses are not possible if we do not record accounts for the business.
Predictions about future: Plans about the future can be two ways. One is long term vision and other can be near term plan like Budgets, Mid-term plans etc.
We need to have long term vision to grow business from small to big. Now to have this vision about business, one needs to have a solid base so that vision can be created with reasonable reality of achievement. So, we need accounting in business because in the absence of the accounting, it is almost impossible to predict the future growth of the business and milestones. In addition to long term visions, organizations are also supposed to work on short term goals Annual Budgets/Mid Term Plans etc. Thus, all the enterprises need to have clear future projections about revenue, operating cost and assets that would be required to serve future demands.
Remaining Responsible: Enterprises are considered to be corporate citizen in any country. As like any citizen, businesses do enjoy their rights in their area of operations. However, their rights to operate in any area do come with the responsibility. Every business is supposed to be compliant to various regulations and requirement of the area of operation. So we need right accounting in enterprises to ensure that they are compliant. As mentioned earlier weak accounting or wrong accounting can lead to be business/enterprises being non-compliant and can lead to sudden death of the organization. With the global civilization, real world is becoming smaller and smaller so being non-compliant in one region can lead to have impact on business globally. Apart from being regulatory responsible, organizations also need to be socially responsible and that can happen with the accounting in place. Being responsible can also lead to growth in business and customers also prefer to deal with responsible organizations.
In summary, Accounting is often called “the language of business.” Why? Because it communicates so much of the information that owners, managers, and investors need to evaluate a company’s financial performance. These people are all stakeholders in the business, which is to say they’re interested in its activities because they’re affected by them.
In fact, the purpose of accounting is to help stakeholders make better business decisions by providing them with financial information. Obviously, you wouldn’t try to run an organization or make investment decisions without accurate and timely financial information, and it’s the accountant who prepares this information.