What is Accounting? Why it is Important and How Works with Examples

Urmi Sengupta | Updated on: November 11, 2022

As your business grows, you may realize that managing finance operations have become more complex. As your financial data expands, tackling it in a traditional spreadsheet becomes cumbersome and time-consuming. You need to create more invoices, make newer entries, create financial statements, and the list goes on. 

At this juncture, you may realize that you need a scalable solution that lets you manage your financial data in a hassle-free manner so that you can focus more on managing your business. That's where accounting software that takes care of all aspects of your business becomes an imperative choice. A comprehensive accounting software can help you automate most steps of the financial cycle, enabling you to spend time on other critical business aspects. 

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What is accounting software?

In a nutshell, accounting software helps businesses optimize their financial operations. From creating invoices and calculating taxes to providing better control over cash flow, accounting software is a growth partner that enhances business efficiency, helps manage clients, reconcile bank accounts, and generates insightful reports that improve decision-making.

Key reasons to invest in accounting software

Here are some of the key reasons for investing in accounting software:

  • Helps save time

Maintaining financial processes is a tedious and time-consuming task prone to errors. Especially when your financial data starts growing, keeping track of all facets of accounts becomes a cumbersome process.

A comprehensive accounting software manages all aspects of finances – from accounts receivable, payable to maintaining ledger and more, thereby increasing business efficiency and saving precious time. It helps speed up processes like viewing reports being in the middle of voucher entry, shifting from one work mode to the other seamlessly to help you get the work done faster.

  • Monitors your business financials

Without an accounting software in place, maintaining the books of accounts is a challenging task, wherein everything boils down to the end of the financial year.

A robust accounting software helps you monitor the financial health of your company. It lets you keep track of every transaction getting tracked on a day-to-day basis. Further, accounting software also provides you with insightful reports within a few clicks, making it easier for you to monitor your company's financial performance on a regular basis.

  • Improves cash flow management

Cash is the key element for the survival of any business is a fact well-known to all business owners. As an entrepreneur, it is crucial for you to understand the basics of taxation, accounting, and payroll to run a successful business. A good cash flow management strategy keeps track of all these aspects, along with cash inflow and outflow, seals cash-embezzlement loopholes, thereby forming the foundation of a successful business.

A robust accounting software that facilitates quick and hassle-free accounts receivables and payables management help businesses get paid faster, manage payment, and optimize cash flow. It also further helps in tracking present and future cash flows and provides insightful reports that aid in managing the cash better for new upcoming expenses in the future.

  • Enhances accuracy in accounting

Maintaining accounts manually increases the chances of errors in calculations. That's why having accounting software that automates the entire process is crucial in having error-free statements. A robust accounting software automates all computations, thereby providing insightful reports.

  • Helps scale up easily

While looking for accounting software, opt for the one that allows you to scale and customize quickly. As your business starts expanding into different geographies, you should be able to access reports at the click of a button from anywhere, on any device.

  • Improves invoicing and billing process

As your business keeps growing, you start having recurring orders. This means maintaining invoices and billing becomes more challenging. From creating invoices to reminding customers of pending payments, the invoicing process becomes more complex. However, being an indispensable aspect of business and the key source of cash flow, managing invoices is an important business function that needs to be error-free.    

With accounting software in place, you can mitigate this challenge seamlessly. Accounting software allows you to automate your entire financial process by creating multiple VAT-compliant invoices, supporting numerous billing formats, tracking all your unpaid invoices, and preventing missed payments. It also helps you get insights into which customers have made their payments, which customers are yet to pay, and customers whose due date is soon approaching, thereby providing a solid foundation for managing your company's finances.

  • Manages inventory seamlessly

Inventory management is a critical aspect of your business that impacts the bottom line. A robust inventory management implies optimum stocking and better customer service. Accounting software helps maintain, track, and manage your inventory – from recording item information and tracking item movements to valuing closing stock basis different stock valuation methods.

It also lets you set reorder levels to provide reports on stocks that need to be replenished along with the right quantities and place timely orders, so that you never run out of stock. Further, it provides insightful inventory reports that help get better insights and manage your stocks efficiently.

  • Tax compliances

One of the critical aspects in managing business is tax compliance. Your business should follow the regulations and guidelines issued by authorities to remain compliant and avoid penalties. A comprehensive accounting software helps you remain compliant right from issuing tax invoices to filing accurate VAT returns. Furthermore, the software should allow you record different types of taxable supplies, keep complete track of records and books and generate insightful tax summary reports to stay organized. This helps ensure that your books are always accurate and enables you to apply the right tax to your transactions.

  • Insightful Reporting

One of the key aspects of ensuring that your business keeps growing is having the right data and reports in hand that helps in improving decision making. Accounting software provides deep insights into your business's financial health and helps analyze patterns by providing a 360° view of your business that is accurate and easily understandable. This helps in making quick decisions and maintaining sound financial health.

Key things to consider while opting for an accounting software

  • Automation of accounts processes 
  • Auto-generation of insightful business reports  
  • The reports should be customizable as per your requirement and help in analysis  
  • The software should be able to scale as your business grows 
  • Should support VAT
  • Should integrate several functionalities like accounting, inventory, taxation, and more  
  • Provide remote access to insightful business reports  
  • Quick to onboard and easy to use 
  • Provide quick access to support team  
  • Should have your data secured 
  • Provide option of a free trial to experience the software first-hand 

Why is accounting important for business?

Accounting plays a crucial role in running seamless business operations. It helps improve decision-making by evaluating the performance of a business through insightful reports, tracks income and expenses, and ensures compliance with the regulations.  

Different types of accounting

There are different types of accounting, like financial accounting, managerial accounting, tax accounting, cost accounting, and credit accounting. 

Making the right software choice for you

There's no silver bullet answer to choosing the right accounting software for your business. However, having said that, while looking for accounting software, analyze your requirements, the challenges you want to solve with the software, and which tool would be easier for your team to get onboarded quickly. The bottom line is to opt for accounting software that streamlines your business processes, provides value for money, and is scalable to accommodate growth.


What is a simple definition of accounting?

Accounting refers to the process of recording financial transactions of a business. It consists of summarizing, analyzing, and reporting any financial transactions, providing insights into a company's operations and financial position.  

What are the types of accounting?

There are different types of accounting: financial accounting, managerial accounting, tax accounting, cost accounting, and credit accounting.

What are advantages of accounting?

Accounting provides several benefits like providing insights into the company’s financial health, keeping track of all financial transactions, improving decision-making and much more.  

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