Advantages and Limitations of Accounting

Advantages of Accounting

Welse and Anthony has rightly said that : "A good system of accounting is a store house of valuable information". Accounting being the store house of information has a number of advantages.

These are as follows:

(1) Recording :Human memory has a limited capacity to store every business transaction in mind. Therefore, the need of accounting is felt to record every transaction in different books of Account. Accounting helps in keeping a systematic and permanent record of business, Which may be referred from time to time.

(2) Helpful in Tax assessment : In most of the cases, the business is required to pay income tax, value added tax, excise duty etc.., to the government. The fixation of tax liability is done on the basis of accounts of books, provided these are prepared according to the requirements of taxation laws.

(3) Prevents frauds : The maintenance of proper books of accounts prevent irregularities, misappropriation, frauds, errors etc,. A dishonest employee will hardly get opportunity to commit fraud in respect of cash, goods, etc. If the books are systematically maintained.

(4) Business valuation : If a running business is to be sold or purchased, it is essential to ascertain the value of business. Accounting helps in calculation of this amounts.

(5) Helps in debt collection : When the goods are sold on credit,  the amount of the customer is opened in the books  Proper recording helps to know how much goods have been sold on credit to various customers, how much is the cash received from them and finally, how much is due from them?

(6) Helpful in planning : An efficient management always plans for the future targets, what will be the plan for production, purchase of goods, sales, marketing of goods, advertisement, acquisition of fixed assets, funds etc. in the next Accounting period. All this has to be planned in a systematic manner. Without Accounting data, it is not possible to make effective planning.

(7) Funds raising becomes easy : True and fair view of state of affairs of the business helps the creditors to examine the books of business. If they are satisfied with the financial soundness of the business, they may sanctioned more loans for the future needs.

(8) Evidence in the court : Accounting records can be used as an evidence in the court, to substantiate the claim of the business. Since every transactions in the book is supported by some documentary proof such as memo, vouchers, bills, receipts etc. that is why courts accepts the account books as an evidence.

(9) Comparison : The results disclose by financial  books may be compared with the results of another business. Similarly, the results of the previous year may be compared with the results of next year. The comparison helps in Identifying the weakness and strength of the business.

(10) Ascertain of profits/ loss and financial position of the business : The profit earned or loss suffered by the business can be calculated, if systematic books of business are maintained. Evaluating the performance of business, from profitability point of view, gives vital information to the users of financial statement. Financial position is revealed from preparation of balance sheet. Comparison of assets an liabilities also helps in judging solving position.

Limitations of Accounting 

These are the following limitations of Accounting:-

(a) Permits alternative treatments : Accounting is based on concepts and it follows generally accepted Accounting principles but there exist more than one principle for the treatment of any one item. This permits alternative treatments within the framework of generally accepted Accounting principles. For example, the closing stock of a business may be valued by any one of the following methods : FIFO (First in first out), LIFO (Last in First out), Average price; Standard price etc. but the results are not comparable.

(b) Influenced by personal judgement : Convention of objectivity is respected in accounting but to records certain events, estimates have to be made which require personal judgement. It is very difficult to expect accuracy in future estimates, and as such objectivity sufferers. For example, in order to determine the amount of depreciation to be charged every year for the use of fixed assets. It is required to judge the useful life of the assets. Thus, estimation of the depreciation expenses is charged to revenue and the income disclosed by accounting is not authenticated but approximation.

 

(c) Ignores important non-monetary information : Accounting does not consider the transaction of non monetary in nature. For example, extent of competition faced by the business, technical innovation possessed by the business, loyalty and efficiency of the employees, change in the value of money, etc. are the important matters in which management of the business is highly interested but accounting is not tailored to take note of such matters.

(d) Does not provide timely information: Accounting is design to supply information in the form of statement (balance sheet and profit and loss accounts) for a period, normally, one year. So, the information is, at best, of historical nature and only post-mortem Analysis of the he past can be conducted. The business requires timely information at frequent intervals to enable the management to plan and take corrective action.

(e) Does not provide default analysis: The information supplied by the accounting, in reality, aggregates of the financial transaction during the course of the year. Of course, it enables to study the overall results of the business. The information is required regarding the cost, revenue and profit of each product but accounting does not provide such detailed information product wise.

(f) Does not disclose the present value of the business: In accounting the position of the balance sheet, the assets are shown on the basis of historical cost i.e. the cost at which the assets is purchased. Thus, it is presumed that business has relatively longer life and will continue to exist definitely, hence the assets values are going concern values. The realisable value of each assets, if sold today cannot be known by studying the balance sheet.

(g) Manipulation of Accounting data: The accounting data may be manipulated by the concern authorities in the business. The higher revenue exaggerated figures of assets and undervaluation of liabilities may done to present  a rosy picture of the performance and the financial position of the organization. The latest example is that of Satyam Computers. The way the profit and cash balance are inflated and liabilities are suppressed is the manipulation of accounting data to give the picture of the organization what the authorities want to show.