Accounting

The terms “accounting” and “financial reporting” are often used as synonyms.

What is accounting?

Accounting in the simplest form is systematically recoding, summarizing, classifying, analyzing and reporting financial transactions in the manner of financial accounting, cost accounting, tax accounting and management accounting.

Basically; an investor should understand accounting information because investors can get benefit from these statements to gain information which is used in credit analysis and valuation of organisations.
For fundamental analysis, Investor relies on the company’s financial statements i.e. Balance sheets, Income statements and most importantly Cash Flow statements.
Hence, the knowledge of accounting helps investors to obtain critical information about the company’s financial position & performance and thus helps in assessing the growth potentials of business.

Importance of Accounting

1. Keeps a record of business
transactions

Accounting is important as it keeps a systematic record of the organization’s financial information. Up-to-date records help users compare current financial information to historical data. With full, consistent, and accurate records, it enables users to assess the performance of a company over a period of time.

2. Facilitates decision-making for management

Accounting is especially important for internal users of the organization. Internal users may include the people that plan, organize, and run the organization. The management team needs accounting in making important decisions. Business decisions may range from deciding to pursue geographical expansion to improving operational efficiency.

3. Communicates results

Accounting helps to communicate company results to various users. Investors, lenders, and other creditors are the primary external users of accounting information. Investors may be deciding to buy shares in the company, while lenders need to analyze their risk in deciding to lend. It is important for companies to establish credibility with these external users through relevant and reliable

4. Meets legal requirements

Proper accounting helps organizations ensure accurate reporting of financial assets and liabilities. Tax authorities, such as the U.S. Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), use standardized accounting financial statements to assess a company’s declared gross revenue and net income. The system of accounting helps to ensure that a company’s financial statements are legally and accurately reported.