Accounting in a very simple sense is maintaining a record of varied activities. Thus, Accounting is some things that are used almost by everyone in their daily lives. In our lifestyle, we maintain a record of varied transactions or activities. The Main Advantages and Disadvantages of accounting are as follows:
Advantages and Disadvantages of accounting
Advantages of accounting
Financial Results of Business: the most advantage of accounting is that it helps in determining internet results of a business in terms of profits or losses and divulges the financial status of the business at the top of an accounting period.
Organized and Systematic Records: It is beyond the human capacity to memorize a large number of business transactions. Accounting helps in recording such a large number of transactions in a well-organized manner which minimizes the probability of erroneous and faulty results.
Assistance to Management: Accounting helps the management in effective deciding, efficient control on cash management policies, preparing budget and forecasting, etc. by providing them with useful information in an organized
manner. Information that is provided by accounting helps the management in planning, controlling, and decision making.
Provides Comparative Study: Accounting helps in maintaining the financial data of a business in a systematic manner for each of the years. This enables the comparison of business performance of one year with another year and finding the reasons for the deviation between the two.
Determining the Tax Liability: a scientific record of business activities helps in ascertaining the tax liabilities of a business. Acts as Evidence: In case of disputes, a systematic record of business transactions can be produced as evidence in the court of law.
Helps in Selling the Business: just in case an individual decides to sell his/her business, then properly maintained accounts help in determining the acceptable price at the time of selling off business.
Helps in Obtaining Loans:Â Before granting a loan to a business enterprise, the banks and financial institutions are interested in knowing the profitability and stability of a business. This information is often easily fetched by properly maintained financial statements of the business.
Disadvantages of accounting
Although accounting has several advantages it has certain disadvantages as well which are discussed below.
Based on Personal Judgement: Even though all the business transactions entered in the books are based on proofs but still there are certain transactions that are recorded on the individual judgment of the accountants. For example, a method for valuation of stock may differ from person to person. Similarly, the method of providing depreciation can be varied. This will lead to different financial results by different people and hence the profit so ascertained cannot be considered as
accurate or exact.
Ignores Qualitative Aspects of Transaction: In accounting, only those transactions are recorded in the books which are capable of being measured in terms of money. The qualitative aspects of transactions are ignored even if they have a significant impact on the business.
Ignores Changes in Price Level: The items are recorded in the books of accounts at their historical costs. It doesn’t take into consideration the changes within the price index of the things within the market. Thus, the financial results disclosed by such financial statements fail to reveal truth financial position of the business.
Based on Accounting Concepts and Conventions: The accounts of a business are maintained by following various accounting concepts and conventions. Hence, the net results shown by the accounts are not considered reliable.
Window Dressing: Window dressing implies showing false business results as compared to actual results. The accountant may adopt a practice of showing the manipulated figures within the accounts so as to point out a far better financial position of the business. In such a situation, financial statements fail to reveal the true and actual financial position of the business.
Forecasting not Possible:Â Accounting is based on past events and transactions and does not take into consideration the rapid changes in the market such as changes in the demand for products, changes in the cost of raw materials, etc. Thus, it is not appropriate for making forecasting.
Also, Read
Role of Accounting
The role of accounting has changed over the amount of your time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide information