What is the importance of having a proper accounting system in place and why it is important to understand financial statements?

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thanatassa's profile pic

thanatassa | College Teacher | (Level 3) Educator Emeritus

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A proper accounting system is important both for external and internal stakeholders in a business. For people outside the company, good accounting practices and clear financial statements are crucial in making investment decisions, including whether one should buy a company's stock, loan money to a company, or extend credit to a company if one is a supplier. For business owners, accounting and financial statements help you understand issues such as profitability and cash flow with respect to different operations of a company; if you just look at basic information such as revenue, you don't get a clear picture of whether a given part of the operation is actually making a profit. Accounting is also important for tax purposes.

skb123's profile pic

skb123 | Elementary School Teacher | (Level 1) eNoter

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If proper accounting system is not in place true and fair picture will not available .It will provide wrong picture to the owner who needs to make decisions to save time, cost and energy, Shareholders who need information to invest , creditors who lend money , government who collect tax and banking agencies make decisions whether to lend money or not. Thus we see for proper decision making all those who make use of the financial statements of the company require true and fair picture.

Proper accounting system helps in interpreting the financial statements fairly on the basis of which the decisions are made. financial statements helps in understanding of the financial condition and helps to recognize problems and opportunities.

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