IMPORTANCE OF ACCOUNTING IN EVERYDAY LIFE

While we are learning in school, we always wonder why we need to learn all this? What is its importance? Will we be using this in everyday life?

Above are some of the usual queries we have while we learn any subject in school. Even though its importance will not be understood at the time of learning, each subject has its own importance and use in our everyday life. Just like how physics works in everyday things like steam iron, earphones, camera lens, car seat belt, batteries etc. similar is the use and importance of accounting.

Through this blog, we explain the importance of accounting in everyday life.

First of all,

What is accounting?

As per the definition, Accounting is known as the act of recording, summarizing, analyzing and reporting financial transactions of a business. In simple terms, it is the process of collecting, classifying and recording all the financial data and events of a business in the books so as to determine the financial performance of the business for a particular period of time.

Accounting is known as the “language of business”.

Accounting is a very important process in every business, be it of any type. There are various types of accounting like Financial accounting, Cost accounting, auditing etc. the main purpose of accounting is to accurately record and report a business entity’s financial performance.

Why do you need accounting?

Every business has to have a proper accounting system for assessing various factors.

Keeps a record of the business transactions

The basic need of accounting is to keep an accurate, systematic and complete record of all the financial transactions of a business entity. They should be able to review their transactions at any point of time to assess the performance of the company. If all the transactions are recorded and maintained at the right time, it will be helpful to determine their current position.

Analyze business performance

Accounting helps the business to communicate the company’s performance to its various users like investors, creditors, lender’s, stakeholders etc. the company can determine how well they are performing depending on the accounting reports. Depending upon this only, they can determine their current financial position. It also helps them to compare themselves against their past performance as well as with their competitors.

Meeting legal requirements

The financial statement of any company is required for the direct and indirect tax filing process. Law requires every business to maintain an accurate financial record of their transactions. It helps to ensure reporting of the financial assets and liabilities.

Financial position

Maintaining a proper accounting system helps the business to analyze their current financial position. They will know about the current cash flow in the business, how much capital has been invested, how much funds the business have used, if the company is running under profit or loss and even about the assets and liabilities of the entity.

Helps in decision making process

Only if there is a proper accounting system maintained in the organization, can they determine their position and then help them to take proper decisions for the favorable performance of the entity. For example, if the accounting reports say that the business is running under loss, they can take proper measures and steps to make sure that the company comes out of it and they earn profits.

Accounting skills can be used to apply to your everyday life. Since it is varied and very practical, accounting skills can be applied to many areas of life. It can be used when you have to manage your spendings. It can even be used when it comes to making smart financial investments. Having good accounting skills, especially if learned from as a specific course, are also in great demand by employers.

Even though accounting is thought of as the language of business, it is used in our everyday lives even though we do not notice it, it is more applicable than we think. For example, simply purchasing your favorite cookie or chips from a grocery store involves accounting, both for you (as a consumer), and for the shopkeeper (as a seller). Here, the seller receives the cash in return for the cookie that they give you.

In the above mentioned scenario, even though we as a consumer may not be keeping a record of such single transactions, the seller or the business keeps a record of every such transaction, even if it is a single transaction. They maintain such records using a double entry accounting system.

For the consumer, it is a debit of cash for him and it is a credit for the seller as he receives the payment, because the basic principle of accounting is that for every debit, there should be a corresponding credit.

Similarly, in each and every cash flow, there are some accounting skills involved. Even though we are unaware about it, accounting is an essential element in our day to day lives.

Following are some of the ways in which we can apply accounting in our daily lives:

Tracking income and expenses

Each family has earning members and they have a fixed amount as salary each month. If they are into business, they will have income from the profits that they make. Also, every month, they will also have expenses such as groceries, electricity, education expenses of the kids, dress and other such miscellaneous expenses. Every household will always check on their income and then their expenses. They need to have a balance between both to run a smooth life.

Making a budget

Like mentioned earlier, every family keeps a track of their income and expenses. Since they know an average of their income, they will have an idea about how much they can spend. Just like a national budget is prepared and presented every year, similarly, it is crucial for the households to prepare budgets on a monthly basis. Only then they will be able to make sure that their expenses do not exceed their income. Even though it will not be perfect each time, still they will have an average idea. There can be unexpected situations like medical emergencies which can alter things.

Savings

Most people always prefer to have savings for the safety of their future. Since life can be unpredictable, savings will always be helpful when there is no other source of income. If a person loses his job, or if anyone in the family has any medical needs, or if the business is running under losses, or if you need to start a new venture, in all such cases, a huge amount will be required than we expect. In such cases, the savings kept aside can be used. It is not necessary that the savings need to be used soon, there can be long term savings as well. To have savings each month, or at least alternate months, we should have an idea about incomes and proper budgeting should be done so that by the end of the month you are not short of cash flows.

Making investments

Now there are various methods to save your money. People mostly invest their money in properties, or they make financial investments. Buying properties and selling them later can be a good source if saving. But you have to check for the risks related to it. Another popular form of investment is to invest money in platforms like forex, stocks, bonds and such. There are so many ways to secure your money. The good part about financial investments is that you can get good returns from it. But there are also high risks related to it. It will be good to approach an accounting assistant to help with this. There should be a clear idea about the various platforms and which one can yield good incomes.

All of the above mentioned activities need some planning and it involves accounting skills. We may not know the importance of accounting, but we make use of it in our day to day lives.

For instance, when we head to the kitchen to prepare any dish, we check the pantry and make sure that we have all the ingredients needed for the dish. In case there is a shortage of any dish, we make a list of all the items needed for completing the dish. Then we head to the supermarket to get those ingredients and purchase them.

You might be wondering how all this is related to accounting?

As the first step, by looking at the pantry you are summarizing the items needed from the store. You keep a record of the items that you need and that you don’t need from the store. Now, once you go to the store, you analyze if you have enough cash to make the purchases. When you check if you have given the right amount to the cashier for the products purchases, it is similar to business entities making sure that they are receiving the correct amounts of revenue for the cash invested.

Lastly, reporting is when you communicate to the other party. In our example, if you have given more or less change to the cashier, or if you have received more or less change, you mention it to them based on your analyses. Finally, when you get all the ingredients ready and you prepare the dish which turns out tasty, it is worth all the planning done.

Just like that, if the business entities carry out all the steps and analyze their financial position, they can make profits and can reduce losses.

Above mentioned is just a small example from our day to day lives where we unknowingly use accounting skills. Just like this, accounting is a part of us even if we do now notice it.

Not everyone becomes good at accounting by learning it professionally, it just comes naturally when we plan our lives.

Thus, there are many basic things and activities in our daily lives which use accounting skills. It is an inevitable part of everyone’s life.