What are the top 10 advantages & disadvantages of Accounting?

Let us know, as to, What are the top 10 advantages (benefits) and disadvantages (demerits) of accounting? This helps us to know the importance and uses of accounting for our business and real life.

what are the advantages & disadvantages of accounting

What is Accounting? Its Meaning, Definition & Scope:

Financial Accounting is the art of recording and reporting financial transactions in the books of accounts using financial statements. The main objective is to maintain a systematic record of business transactions of a business entity to evaluate the financial performance & position for a year and to communicate the results to the users of financial statements.

It is the art of recording, summarizing, analyzing, and reporting business transactions of the enterprises by Financial Statements. These statements include the income statement, balance sheet, and cash flow statement

In 1966, American Accounting Association defined it as, "the process of identifying, measuring, communicating financial information to permit judgements and decisions by users of accounts."

Accountancy refers to a systematic knowledge of accounting. It tells us how to prepare the books of accounts and how to summarize the accounting information to communicate it to the users of information. The users are creditors or suppliers of raw materials and finished goods, debtors or customers, investors, employees, tax authorities to levy a tax, management to take useful decisions, government and their agencies, and the general public. The users are interested in the performance or profit or loss of a business entity.

What are the top 10 advantages, benefits, uses of Accounting?

Let us now discuss the advantages and uses of Accounting which are listed below. These benefits and advantages help us to know the financial performance & position of the business enterprise and also help in decision making.

1. Permanent record & maintenance of Business Transactions

Generally, every business organisation has a lot of financial transactions that occur on day to day basis. Accounting helps to identify, analyse, record, process, store all the monetary business transactions in the books of accounts & financial statements. The books of accounts include journals, ledgers, trial balance, cash books. Financial statements include trading, profit and loss account, balance sheet, cash flow statement. This helps to record & store financial transactions in the books of accounts.

2. Provides information to Users & Stakeholders

Accounting helps in providing useful information to the users of financial statements. The information contained in financial statements helps to know the financial performance/position of the business enterprise. The User & Stakeholders include Management, Debtor/customers, Suppliers/Creditors, Banks, Competitors, Investors, Shareholders, Government who are curious to know the financial performance/position of the business enterprise.

3. Assists in Preparation of Financial Statements

It also helps to prepare and present the financial statements to know the financial performance/position. These financial statements are prepared by the management as per the applicable Accounting Standards or Generally Acceptable Accounting Principles. Financial Statements include Trading and Profit & Loss Account, Balance Sheet, Cash Flow Statement. These financial statements are prepared at the end of the year to close the books of accounts.

4. Depicts the Financial Performance & Position of business entity

Generally, Users of information are so curious to know the financial standings, profit or loss incurred by the business organisation. Especially, investors or shareholders are very interested to know the Financial Performance & Position of the business entity. The User & Stakeholders include Management, Debtor/customers, Suppliers/Creditors, Banks, Competitors, Investors, Shareholders, Government who are curious to know the financial performance/position of the business enterprise. The financial statements help us to know the financial performance/position of the business entity.

5. Comparision of Financial Results of Business Entities

It helps in the comparison of financial results of two business entities using Financial statements for the same year. It also helps us to analyse & compare the financial performance/ position of last years with the current year. Comparison of results is possible only when management uses the same accounting policies, principles consistently while preparing and presenting financial statements

6. Assists in Legal Compliance & Taxation matters

It also helps in Legal Compliance & Taxation matters. For example, management has to comply with the relevant applicable accounting standards while preparing and presenting financial statements. Management has to also ensure that it calculates the total income of the business entity as per the relevant tax laws to pay income tax. Also, Management has to pay GST (goods and service tax) on the supply of goods/services as per the GST laws, if applicable.

7. Assists in Decision Making

It helps the management to take decisions on various financial aspects. For example, Management can devise a strategy to enhance profits, sales for the upcoming years. Management can also take various decisions on the purchase of assets, making investments, raising loans/funds, reducing costs considering the profit and loss statement, balance sheet, cash flow statement.

8. Assists in Valuation of Business Entity

It also helps the management to value the Business entity. For example, management can calculate the Net worth of the business, value the shares using financial statements such as balance sheets or statements of operations. Thus this helps to value the business using different methods, considering balance sheet, profit & loss a/c as well.

9. Assists in performing Audit of Business Entity

The Audit is an independent examination of financial information contained in the financial statements with a view to express an opinion on financial statements. This Audit ensures that the profit and loss statement, the balance sheet has been prepared by the management using applicable accounting standards, also to reduce errors/ frauds.

10. Prevention & detection of frauds, errors, forgery

It is the responsibility of the management to ensure that the proper controls have been implemented to prevent and detect frauds and errors. Thus Accounting also assists in reducing the count of frauds, errors, forgeries happening in the business entity. The Audit ensures that the profit and loss statement, the balance sheet has been prepared by the management using applicable accounting standards, also to reduce errors/ frauds.

Let us see, as to, What are the top 10 limitations(disadvantages) of Accounting? This would help us to know the demerits and disadvantages of Accounting and it's scope as well.

What are the demerits, disadvantages, limitations of Accounting?

1. Financial statements are prepared based on Historical costs. Thus balance sheet may be misleading if there is a fluctuation in historical cost and market value of assets and liabilities recorded

2. Financial statements may not be comparable if the business entities use different accounting policies and practices

3. Information contained in the financial statements could be misleading and false if management wants to disclose the healthy financial performance and position even if it makes losses.

4. Accounting is a cumbersome and technical subject that is not easy to understand for a common man unless he possesses sound knowledge of the subject.

5. Cost controls are not possible as they are known at the end of the year after preparing financial statements

6. It doesn't record the changes in price fluctuations and does not consider the market value of assets in the balance sheet

7. Accounting information may be based on Estimates. These estimates may be inaccurate and not reliable which may give incorrect or misleading information.

8. Future probable incomes or profits are ignored and will not be recorded. But future expected losses are accounted for and provided with a provision as well.

9. Management may intentionally create secret reserves by increasing or decreasing the values of assets and liabilities in the balance sheet. This will again give incorrect or misleading information in financial statements.

10. Implementing complete Accounting is Costly and Expensive which small organizations may not afford the same. Recording all the business transactions, maintaining books of accounts and preparing financial statements is costly and expensive for small business entities

Conclusion

Thus, we have come to know, as to, what are the top 10 advantages and demerits or disadvantages or limitations of Accounting. Advantages of accounting would include the record of business transactions, which depicts the financial results and financial position of a business entity. Limitations would include Financial statements are based on historical cost and may give misleading and incorrect information. Implementing this entire system is costly and expensive for small business entities. Future anticipated incomes and gains are ignored or not recorded as well.

What are Ledgers?

What is Trial Balance?

What are Financial Statements? Its features, types, uses

What is Income Statement (Profit and loss a/c)?

What is Balance Sheet (Position Statement)?

What is Cash Flow Statement?

What is Bookkeeping? Its features, objectives, uses?

What are Subsidiary Books? Its features, types, objectives, uses

What is Single Entry System? Its features, types, objectives, uses

What is Double Entry System? Its features, objectives, uses