How is financial accounting important?


It is not just the math involved that makes some people zone out once they hear any form of accounting, but the fact that it has connotes the need to pay attention to details and pay attention to what and how money is being spent. However, the importance of the knowledge of financial accounting does not stop at the organizational level. Once you know the basics, you will find that it can be applied in everyday life to improve upon an individual’s financial planning and activities.

In this article, we’ll be focusing on the importance of financial accounting and how individuals can apply it for a better financial bottom-line.

  • Financial accounting is important for informed decision making because it presents key financial information about a business entity in a format that is easily understandable for swift decision-making. Through the manner that the details of an entity are presented, trends can be established, monitored, and forecasted about whether certain decisions produce profits or losses.

Amazingly, this knowledge can also be used to track the economic activities of an individual to determine the best future course for financial decisions. Discussions on online platforms such as and others can reveal how people apply the rules of financial accounting in major decisions such as whether to buy used or new cars, what type of financing to obtain, and so on.

  • Money drives ideas, and without access to cash, many ideas have become figments of people’s imaginations. However, having money to fund an idea does not mean success is imminent. Rather, understanding how long and short-term decisions about money: budgeting, breaking even, compounding interests, and so on, can affect a business entity or an individual is important to business success. Every business and sector has an aspect that requires analysis of income and expenditure, from the medical industry to education, agriculture to information technology. Hence, it is not wrong to opine that financial accounting is the lifeblood of the economic society.
  • Tracing leakages is also a key part of financial accounting. Business entities and individuals can trace expenses that have been overcharged, or which decision affected the bottom line negatively to avoid such. By tracing such leakages, financial accounting helps to plug such holes to ensure that money is retained. On an individual level, for instance, the knowledge of financial accounting will help determine which activities to stop to save money, e.g. which magazines you subscribe to regularly but do not read, what payments you are charged for without maximizing or even using the facility, and so on.
  • Financial accounting is also important in planning the future of entities and individuals. It helps to analyze investment opportunities, produce savings goals, analyze spending, enforce debt control and encourage profitability through its concepts and procedures. For instance, individuals can look at the trends of growth of certain companies to determine which is healthiest, and which has the likelihood for sustainability through the financial records of such an entity. Companies can also analyze which activities to focus on for improved profitability.

As much as possible, this article has attempted to sound as lay-man as possible, especially considering the misconceptions around financial accounting. In reality, humans apply the principles of financial accounting daily: grocery shopping, paying bills and taxes, choosing to eat out or dine in, increase the family by having a baby or maintain the ones you have, and so on.

However, paying attention to these decisions and their financial implications is only one of the starting steps of being financially intelligent. And financial intelligence is a major requirement for building any sustainable business or individual economic structure of any scale.