Question

Sub: Financial Accounting Theory capstone and reference

1) Why is accounting so important for a nations economy?

Answer 1

Solution:

There are a number of ways in which accounting help in nation economy building some of them explained as follows

1. Correct Tax collection: Proper Accounting helps to provide the correct profit based upon which the national government collects tax and invests that collected money in different projects like construction of road, railways, etc which in turn boost the national economy.

2. Mobilizing the domestic investment: Accounting serves as a base for the statutory and other kinds of audits which in turn helps to create trust among the people who are willing to invest. This channelizes the domestic household saving to productive use and has a multiplier effect on the national economy.

3. Foreign investment: Accounting Helps the companies and businesses to attract foreign investment which is a key in national development. A proper set of books of account and other relevant detail which accounting provide generate the trust factor among foreign investors.

4. Decision Making: Accounting has different braches one of them is management accounting helps in project evaluation and helps management to take correct decisions which in turn helps the company to earn profit and contribute to the national economy.

5. Framing National Policies: The government uses Industry data which is based on accounting to draft policies at national and industry-specific to address the concerns and boost productivity in the economy.

6. Economic Health Assessment: Accounting results of the individual company and then industry basis helps the government to gauge the current economic situation like slowdown to take corrective actions on time.

7. Price Fixation: The government uses the cost accounting data to decide the maximum price for essential commodities so that such product remains within the reach of common people and the economy continues to grow because aggregate demand is one of the most drivers of the economy.

8. Accounting results help the trade union to demand the correct justified wages from the business which helps to maintain standard of living of people and aggregate demand which keeps the wheel of the economy to run.

9. Prevent financial frauds: Accounting act as a base for the audit which helps to prevent financial frauds in business and keep the faith of business and people in nations economy.

10. Accounting results help the bank and other financial institutions to lend the capital to creditworthy business especially small and medium entities based on their past financial soundness which is measured with the help of accounting results. This helps to strengthen financial and industrial/service sector to leverage debt and maximize their earning by running the business cycle without running out of cash.