Accounts and Auditing – Importance of Accounting and Auditing?

Accounts and Auditing – Importance of Accounting & Auditing?
|Updated on: July 21, 2022

Accounts and auditing are two processes that are vital for every business in today’s landscape. Here are the basics you need to know about accounting and auditing such as what they mean and why each is so significant for your business.

What is accounting?

Accounting is the process of recording, organizing, and analyzing the financial transactions of a business. The analysis is based on reports that are generated using the financial transactions as the foundation. Accounting is a step ahead of bookkeeping because it is much more than simply organizing all the business financial data into proper groups as per standards. Today, accounting is done with the help of accounting software such as TallyPrime that enables automation and complex calculations to take place. Accounting can be done on a cash or accrual basis depending on your business. 

There are many types of accounting. Financial accounting includes the generation of financial statements that reveal the health of your company. This is used by auditors, investors, and lenders to determine how profitable your business is. Managerial accounting deals with the generation of statements that are used by your business to be used to make changes to processes. Cost accounting involves evaluating and studying costs in-depth to make decisions accordingly. Tax accounting ensures proper filing of tax returns. Credit accounting is ensuring that sufficient cash remains in the business even if the business has liabilities and debt.

Why Is Accounting Important For Business? Accounting Software and Its Benefits

What is auditing?

Auditing is the thorough verification process that involves examination and analysis of a process, product, or system of a business. The major purpose of auditing is to ensure compliance by a business. Audits can be to check performance, compliance, and they can also be for the purpose of follow-up. There are three different types of auditing; process audit, product audit, and system audit. A process audit examines processes and ensures they are working according to standards. A product audit analyses the product or service to ensure it is working as per the requirements. A system audit is when a system is evaluated for its effectiveness and efficiency.

An audit can be first-party, second-party, or third party. In a first-party audit, the audit is performed in the business and the evaluation occurs whereby its procedures are compared to those of external standards. In a second-party audit, an external audit takes place. This is generally done with the help of a contract. In a third-party audit, an audit organization that has no connection to the business performs the auditing process. The entire auditing process depends on the type of audit, the individual or people performing the audit, and the nature of the audit.

Why do we need accounting?

Accounting is key for making informed and smart decisions about your business. If you haven’t invested in accounting software, you are at risk of wrong record keeping which can crumble your business in no time. Accounting is essential because it forms the basis of your business. With accounting, you know about your revenue, profits, expenses, and losses. It enables you to reach your goals in a systematic manner because you know exactly where the money is going. Accounting lets you make last-minute decisions with ease.

Accounting should be a priority of every business owner because of how valuable it is. It ensures you are paying taxes on time and you are paying exactly what you owe; nothing more and nothing less. It allows you to pay your employees on time. Accounting enables you to get access to insightful reports that give you detailed overviews of any part of your business. Accounting ensures you are not in trouble because of your debts and allows you to keep track of your debt-related information. It also helps you attract investors and get a loan when you need it. 

Why do we need auditing?

Auditing is necessary because it gives you an unbiased overview of your business. This can act as a fundamental step to ensure you know what you are lacking or where things aren’t as per standards. It enables you to make decisions for the betterment of your business. Auditing often weeds out errors that may exist in your processes. You can only make changes when you know the problems that exist. With auditing, this becomes possible and so you know the errors that exist and you can then focus on the solutions to ensure your business is working as it should without problems. Auditing ensures transparency as well.

External auditing enables your business to look more credible to outsiders and helps ensure a positive public image. If you plan on selling your business in the future then it becomes easier for you because the auditing process has already been done. External auditing can also improve your credit rating. This can attract the right type of attention from investors and your bank. This holds true when you regularly perform auditing of your business processes. Auditing helps you cement your relationships with suppliers and clients as they often require auditing to proceed further especially in the beginning. 

Key differences between accounting and auditing

Accounting and auditing are two important processes that every business must think about. Here are the key differences between the two processes.

Accounting

Auditing

Accounting deals with recording, storing, and organizing financial transactions of a business in a way that is easy to retrieve later when required. Accounting is performed by accountants or with the help of an accounting software tool like TallyPrime.

Auditing is a process that involves ensuring that the data provided is true and there are zero discrepancies. Auditing unveils any errors and problems that exist at present and allows for rectification of those issues. Auditing is performed by auditors.

The purpose of accounting is to ensure you are aware of your financial standing and you are on top of your financial information. Accounting ensures you know how profitable your business is, how much debt you have, and what revenue you are earning.

The purpose of auditing is to ensure the accuracy of the data provided and to ensure it matches with that of what it should be. Auditing, whether done internally or externally, ensures transparency and integrity.

Accounting helps you to understand your business performance based on some metrics. It gives you the tools you need to compare your current performance with your past performance so that improvements can be made.

Auditing helps you understand the efficiency of your business processes and whether they are aligned as per the requirements. If there is any issue with the way your processes are working at the moment, then you need to change them so they meet the standard.

Accounting is an activity that is performed daily. With an accounting software solution like TallyPrime, automation ensures every financial transaction is recorded and interpreted correctly when required.

Auditing is not done every single day like accounting. Auditing is done periodically. In some cases, businesses can get external audits monthly while others prefer yearly. Quarterly audits are also performed in certain businesses.

Accounting is not limited to financial transactions because you can derive important information about your business through it. Accounting or a lack of it can directly impact your business outcomes and can cause issues with auditing.

Auditing is also done on your financial statements to ensure they are up to par and they meet the standards. Having proper financial statements allows for easy auditing because you have all the necessary information about your business in one place.

Accounting is an internal process because a business needs to either hire an accountant perform accounting or use accounting software. The results of accounting, which are the financial statements, can be shared with people outside the company such as stakeholders and so on.

Auditing can be an internal or external process. The functions are the same whether done internally or externally. However, external auditing inculcates more faith in your business as processes and systems are checked by people who are not directly associated with your business.

TallyPrime for accounting

TallyPrime is a software package that is made to make business management easier. It is an automated accounting tool that lets you record and analyze your financial transactions so they make sense to you. It comes with a broad range of features such as inventory management. TallyPrime comes gives MSMEs the ability to generate more than 400 unique reports including management control reports and accounting reports for making the best decisions. It also enables you to create professional e-invoices in minutes. TallyPrime provides credit and cash flow management too.

TallyPrime comes built-in with payroll management so you can automate payments to your employees and ensure transparency. You can track employee attendance and group employees based on your business model. TallyPrime comes with an auto bank reconciliation feature and a check management feature for hassle-free payment. It enables you to synchronize your business data even if you have several branches enabling you to take a centralized approach to accounting. TallyPrime provides an easy-to-understand interface so you can perform accounting with ease.

Read More: 

What Do Accountants/Businesses Look for in an Accounting Software, Best Practices to Evaluate, Purchase and Implement Business Accounting Software, Glossary of Accounting, Capital Lease, Life Cycle Costing, Budgeting vs. Forecasting, Royalty in Accounting, Auditing Process, External Audit

TallyPrime

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