Why does Your company need accounting?
Accounting is a broad entity intertwined with many different laws, regulations, guidelines and statements. By following these, we will learn how to do accounting. There is a lot of information on how to do accounting, which is understandable: we do the right thing when we know how to answer the question “how?”.
Significantly less information can be found to question why we do accounting. It may be that the answer is assumed to be too obvious or worthless. However, it would always be worth taking the time to ask why we do something. We do the right things when we know how to answer that question. And after all, in addition to doing things right, we want to also do the right things. There is always some reason behind the things that people come up with, so in this post we will focus on the reasons behind accounting.
This post is the first part of the Good to Know About Accounting blog series. In the blog series, we tell you things that an entrepreneur should know about accounting.
The importance of accounting
There can be many reasons for things and often the answer depends on the point of view. However, an objective anchor can be traced back to history, i.e. why accounting was invented. This is not self-evident in terms of accounting. The history of accounting is almost as long as the history of writing, but information about it can be searched from the internet. Even the most significant accounting documentation of all time, the first detailed description of double-entry bookkeeping, is just one copy in a Renaissance book of mathematics. Nowadays, however, all companies and communities everywhere keep mostly double-entry bookkeeping, or at least some kind of accounting, so it’s not quite an insignificant issue.
Why we do accounting? I had a clear answer to this as I started doing accounting nine years ago: the work is concrete, and I get paid for it. The answer certainly describes almost all work, but for many factors, this reason is important and valid, nonetheless. However, this is not the main reason, because the long history of accounting would have been cut long ago if it had only been relevant to its authors.
Accounting obligation applies to every entrepreneur
It is clear to every entrepreneur that accounting is done because it is required by law. There is no alternative, even if the omission of accounting would seem tempting. Accounting is the basis for tax calculations, so for the state, accounting is not only relevant, but a condition of operation.
For many, the first contact with accounting is likely to come from the perspective of the taxpayer. About the conflict between the taxpayer and the taxable person, there are enough storytelling materials for almost any story. In my experience, however, the connotation is almost always negative. Either we have a depriving tax bear or a tax evader who selfishly props up his own interests.
Accounting helps to understand a company’s finances
The accountant benefits from his job and the taxpayer benefits from his tax revenue, so does the taxable party – the entrepreneur – have anything other than to suffer a loss? That may well be the case. If the company’s finance is sufficiently manageable without accounting, it can feel like a mandatory extra work for the entrepreneur.
Hardly many people do complicated accounting for their personal economic because we typically know our own income, expenses, assets, and liabilities quite well. The importance of accounting for an entrepreneur is emphasized as the number of things to manage increases. That is when we need model of the economic situation, and that is what accounting is all about: a model of economic reality. Whatever the case, there is a high motive for understanding company’s finances, because it allows for better decisions and actions.
Accounting helps to understand a company’s finances and make better decisions for the company.
Budgets and forecasts can be prepared based on accounting.
The most important function of accounting is to produce information for the company itself.
Accounting offers better opportunities for the companies
I have a guess at the accounting motives of Mesopotamian times, but the reasons behind certain accounting advances are crystal clear.
Take, for example, the poetically beautiful double-entry bookkeeping. It was not originally done for accountants or taxpayers, but for the entrepreneur himself. Double-entry bookkeeping has been done around the world by different merchants. The method is as if waiting for its discoverer and did not come from the top down dictated by one guru, but from the bottom up to be documented by one guru. The task of the guru – in this case the Franciscan monk Luca Pacioli – was to compile the method in detail on a single cover, from which it is more easily accessible to all.
Double-entry accounting provided a better and more reliable method of describing the economy, which not only enabled better decisions, but better opportunities in general. It opened completely different doors to access to credit and at the same time enabled the development of the entire banking business.
Accounting helps to understand reality
Accounting is a significant part of human history and development, although it seems more like an invisible background influence. Accounting can also be done wrong when artistic creativity is applied to it. The benefit of accounting can also be genuinely questionable for an individual. I still take different perspectives on accounting and its significance with open arms. However, I would argue that we would not have accounting, at least in its current form, if there was no genuine desire to understand reality in the background. It is hard for me to come up with a better reason to do things.
Jere Värri | Financial Advisor
We can help with accounting requirements
Accounting obligations depend on the size and type of company. We can help meet accounting requirements. Our accounting experts ensure that your company’s financial management is based on correct and up-to-date information and includes the necessary documents.
In the next post in the blog series, we will explain why accounting is important for your business and why it is better to see it as an opportunity rather than a mandatory obligation.
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