Accounting | Why It's Important

May 27, 2015

What’s all the fuss about Accounting?!

The first thing we establish in every accounting class is pretty simple: Why do we need Accounting? What’s so important about it and why do people take it so seriously?

The first few responses I get in my classes usually center around a pretty straight forward, “Because the government makes us,” and of course, that is very true and very relevant.

But let’s go deeper. Why? The next logical response is “Because we want to know how much money we have and how much we made”

And boom! There it is.

Accounting is the language of business. It is how we understand what’s going on financially.
Accounitng Why It's Important

Most decisions made in running a business cost money in some way. So before you spend it, you want to make sure you have enough of it, right? If we spend more than we have, what happens? Can we pay it off? How much debt do we have? When does it have to be paid off? These questions seem pretty obvious, don’t they? You’d think…

Most people are familiar with the old examples of Enron (Houston based oil and gas company that went bankrupt in the 2000’s) and the many banks/companies that needed a government bailout in 2008. In most of these cases, the companies involved had way more debt than they could handle. Many people lost their jobs (over 20,000 in Enron’s case) and it was just a bad situation all around.

Well, turns out that an entire country can go bankrupt because of inefficient and inaccurate accounting systems, not just companies.

Example: Greece

Earlier in January, The New York Times published an article pointing out all the flaws in Greece’s accounting system which, in a nutshell, are all rooted in the fact that they don’t follow international standards set for correct accounting. Their standards for calculating their assets (what they own that has value) and their liabilities (their debt, or what they owe) are not held to an international standard, and they aren’t accurate.

Since Greece didn’t have accurate information, it was easy for them to continue spending more than they had. Even when they tried to bring their debt down and cut spending, they couldn’t accurately measure how they were doing and if those initiatives were working, because again, their accounting system is not accurate.

Talk about a bad situation.

According to the same article, Germany gave Greece a loan to help them pay off some of their debts to the International Monetary Fund, but since their don’t use the international accounting standards either, it turns out Germany will also probably also lose a lot of money (up to $51 billion) in the process.

It’s really bad now. Based on another NYT article published just this week, “Greece is all but bankrupt.” They almost couldn’t make a $750 million payment two weeks ago, and unless there’s a miracle or the creditors make some kind of deal with them, they will not be able to make the June 8th and 9th payments either. One officer said that if that happens “it’s all over.” State funded schools and hospitals are facing the worst of it. Doctors are over worked and underpaid, and many are now starting strikes. Crime is abounding and private citizens are having to fund the police out of their personal pockets to deal with it. Road construction and other necessary improvements are being stalled.

Talk about a bad situation.

There are many reasons for this, but certainly, inaccurate Accounting is very high on that list.

And THAT is why Accounting is important. Whether it’s for a family’s personal budget, a company, or a country, it is SO important to be aware of how the entity is doing financially. Once you know how you’re doing, you can make decisions accordingly. However, even if a leader knows where the company stands financially and doesn’t make the right decisions, well, what good did the accounting do? That’s another topic for another day, but until then, let us focus on the number priority for all accountants and all accounting systems: Just do it, and just do it right.

And THAT, to answer your question earlier, is all the fuss about Accounting.