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Merits And Demerits Of Accounting

Last updated date: 16th May 2024
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Advantages of Accounting

Accounting is a process that involves recording the financial transactions related to business. The process includes summarizing, analyzing and reporting these transactions to regulators. Agencies and tax collection entities. While there are too many benefits in accounting, it also has some disadvantages. 

Advantages and Disadvantages of Accounting Information

  • Maintenance of Business Records: Records of all the transactions related to a business for a particular period in the book of accounts.

  • Preparation of Financial Statements: Financial statements like Profit and loss account, Cash flow statement, and Balance Sheets are prepared with the recorded transactions. 

  • Comparison of Results: The financial statements facilitate the comparison of business results of a year with the other one easily.

  • Decision Making: Ultimately, it becomes easier for the decision making authorities to make a decision or plan for future activities. 

  • Evidence in Legal Matters: Thus prepared records to become evidence in the court of law.

  • Provides Information to Related Parties: Proper Accounting records make financial information available for the owners, employees, customers, government etc. 

  • Helps in Taxation Matters: Accounting information helps the tax authorities for settlement of taxation matters.

  • Valuation of Business: Accounting information helps in measuring the value of the business in case of sale of an entity.

  • Replacement of Memory: Recording of accounting information replaces the necessity to memorize records. 

Disadvantages of Accounting

  • Records in Terms of Money: Since the transactions that are measurable in terms of money can only be recorded, non-financial transactions are not given effect in the book of accounts.

  • Records Based on Estimates: Certain data are based on estimates and of the accuracy of records may not be possible.

  • Records may be Biased: Since the accountant’s influence affects the accounting information, it may be biased.

  • Records at the Original Cost: The balance sheet may not disclose the exact financial status of the company due to the difference between the original cost and replacement cost due to the various aspects.

  • Manipulation of Accounts: The accountant may manipulate the profits of the business.

  • Money as a Measurement Unit Changes in Value: Since the value of money keeps changing, the accounting information will not show the true economic position of the company.

Advantages and Limitations of Accounting

  1. What are the advantages of Accounting? 

The major advantages of accounting are complete and systematic records, determination of selling price, valuation of the business, helps in raising a loan, evidence in the court of law, in compliance of the law, inter-firm or inter-firm comparison. 

There are benefits of accounting like controlling budgets, forecasting revenues, major business decisions, tracking business expenses, record-keeping for financial institutions for taxation, monitoring business growth, etc. that contribute to the better economic growth of the business. The limitations of accounting standards are shown as an image below.

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What are the advantages of Final Accounts? 

Preparing final accounts supports the trader to value the profitability of business at the end of a particular period, on comparing the gross profit with the sales of the company. To know the financial position and value of a business, the management prepares financial statements.

FAQs on Merits And Demerits Of Accounting

1. State the advantages and disadvantages of Accounting Standards.

Ans. Accounting Standards (AS) is the major ruling force in accounting. 

Advantages of Accounting Standards

  1. Uniformity in Accounting: AS has a standard format for financial statements thus attaining uniformity in accounting methods.

  2. Reliability of Financial Statements: AS presents a fair picture of the financial position of the business which improves the reliability and trustworthiness with the stakeholders to make decisions.

  3. Prevention of Accounting Manipulations: Following the AS are compulsory for management since it prevents any accounting manipulations. 

  4. Assists Auditors: Accounting standards, when followed correctly assists the auditors to check if they are true and fair.

  5. Comparability: AS facilitates the users to compare and analyze the financial performances of a company for different years before making any decisions. 

  6. Determining Managerial Accountability: AS helps in measuring the ability of the management to increase profitability and other financial duties for the betterment of the firm.

Disadvantages of Accounting Standards

  1. Can be Inflexible: Accounting standards do not involve a flexible framework since the accountant practices only the guidelines that fit into the GAAP standards.

  2. Compliance Can be Costly: Compliance with the standards can be a costly affair since it requires huge financial investment which includes labour costs, employee training, system upgrades etc.

2. Explain the advantages and limitations of Financial Accounting.

Ans. The advantages and disadvantages of financial accounting are discussed below:

Advantages of financial accounting are that it helps in maintaining the business records, preparing financial statements, comprising results, decision making, being evidence in legal matters, taxation matters, business valuation, etc.. Though there are too many advantages of financial accounting there are certain limitations too. These are - 

Records only monetary transactions: Since Financial Accounting records only the transactions that can be measured in terms of money, it affects the soundness of the business. 

No consideration of price level changes: Accounting accepts does not consider the changing price levels.

No realistic information is provided: The information provided may not be realistic since they are prepared by following the basic concepts of accounting.

The personal bias of accounting affects the accounting statements: The Accountants personal influence may affect the preparation of financial statements.

Window dressing in the balance sheet: Since manipulations might have been done by the accountant, the balance sheet will not show the true financial status of the entity.