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
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 Accounting: Merits and Demerits Simplified
1. What are the merits and demerits of accounting?
Accounting offers many merits, such as
- providing accurate financial records,
- helping decision-making,
- and ensuring statutory compliance.
- possible errors,
- dependency on historical cost,
- and ignoring non-monetary information.
2. What are the advantages of merits and demerits?
Understanding the merits and demerits of accounting helps businesses make informed decisions. The main advantage is recognizing how accounting supports transparency and control, while the drawback is awareness of its limitations, helping users set realistic expectations for financial management.
3. What are the merits and demerits of management accounting?
Management accounting merits include
- better planning,
- control over operations,
- and improved resource allocation.
- subjectivity,
- costly implementation,
- and complex reporting.
4. What are the merits and demerits of price level accounting?
Price level accounting adjusts financial statements for inflation or deflation. Merits include
- accurate asset valuation
- and more realistic profit measurement.
- complex calculations
- and possible confusion from fluctuating price levels,
5. Why is it important to know the merits and demerits of accounting?
Knowing the merits and demerits of accounting helps users analyze the effectiveness of financial practices. It allows businesses to benefit from strengths, such as reliability, while also being cautious of weaknesses that could create misunderstandings or misstatements in financial records.
6. How do the merits of accounting help businesses?
The merits of accounting assist businesses by
- keeping track of transactions,
- producing financial reports,
- and complying with laws.
7. What are the main limitations or demerits of accounting?
Accounting has major demerits, such as
- ignoring qualitative factors,
- using historical cost,
- and possible human errors.
8. In what situations do accounting demerits create problems?
Accounting demerits can cause problems when
- making investment decisions,
- evaluating business worth,
- or assessing risk.
9. How does management accounting differ in merits and demerits from financial accounting?
Management accounting focuses on aiding internal decision-making, with merits like tailored reports, but can be subjective and costly. Financial accounting provides standardized statements for external use but lacks detail for management needs. Each system’s strengths and weaknesses suit different users.
10. Can price level accounting overcome the demerits of historical accounting?
Yes, price level accounting helps address the demerit of using outdated costs in historical accounting. By adjusting for inflation, it presents a more accurate financial picture, but its complexity and harder interpretations can be challenging for some accountants and business users.
11. Are there merits and demerits unique to each accounting method?
Each accounting method has unique merits and demerits. For instance,
- cash accounting
- and accrual accounting
