Accounting (also called accountancy) refers to the systematic process of
identifying, classifying, summarizing and recording of financial
transactions or economic affairs of the business. It helps to determine the
net results (profit or loss) of the company that reflects the financial
health of the business.
In this post we are going to discuss some notable merits and demerits of
accounting system.
Advantages Of Accounting
The main advantages of accounting are as follows:
1. Identification Of Transactions
A business organization performs various activities (both financial and
non-financial) to achieve the goals and objectives. Accounting identifies
the financial activities or monetary transactions that helps to consolidate
the financial information.
2. Proper Maintenance Of Transactions
Another advantage of accounting is that it maintains proper records of
business transactions systematically in the books of accounts such as
journals, ledgers, subsidiary books etc. in chronological order.
3. Reveals The Financial Position
Financial statements such as income statement, trading account, profit and
loss account, balance sheet etc, are prepared on the basis of data recorded
in the books of accounts. It helps the firms to determine the net results
(profit or loss) and to ascertain the financial position of the
business.
4. Price Determination
Accounting helps the firms the firms to determine the cost of production.
So, a firm can fix the selling price for its products by adding certain
profit margin. Therefore, it is useful for setting price for products or
services.
5. Decision Making
Good accounting system provides accurate financial data and information to
the management. So, it helps the managers to make decision and formulate
future plans and policies.
6. Tax Determination
Another notable advantage of accounting is that it helps the firms to
determine the tax liability. Financial data obtained from financial
statements helps to calculate tax liabilities.
7. Result Comparison
It assists the management to compare financial results of current period
with the results of previous years. It helps to find of the deviation and
take corrective measures if needed..
8. Simplifies Auditing
Properly maintained accounting system simplifies the auditing process. If
books of accounts and financial statement are properly prepared, then
auditor can perform his/her task easily in short time.
9. Evidence In Court
In case of any dispute, accounting data and information can be presented as
proof in the court.
Disadvantages Of Accounting
The main disadvantages of accounting are as follows:
1. Complex, Time Consuming And Costly
It is more complex system of recording business transactions. It consumes
more time to collect, summarize and record the transactions. Qualified
personnel should be hired to maintain proper accounting system in the
organization. Therefore, it consumes more time, cost and labor. So, it is
not suitable for small firms having less volume of transactions.
2. Ignores Qualitative Factors
Accounting records and provides data and information about financial
transactions of the business. It completely ignores important qualitative
aspects or non-monetary factors such as efficiency, working condition,
employee morale etc.
3. Based On Historical Data
Accounting uses historical data and estimates to generate financial
reports. So, it may fail to provide true results.
4. Possibility Of Manipulation
Another disadvantage of accounting is that there is high possibility of
manipulation of financial data. Accounting data can be manipulated or
changed by showing less profit to reduce the tax liability. On the other
hand, it may show higher profit to impress the investors.
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5. Possibility Of Error
Financial data should be correctly recorded in the books of accounts to
reveal actual financial position of the business. One wrong entry leads to
inaccuracy in whole accounting process ans shows wrong result.
Pros And Cons Of Accounting In Short
Pros
* It ensures proper recording of financial activities
* It reveals the financial position of the firm
* It helps to determine the tax amount
* It is useful to obtain loans for financial institutions
* It assists in decision making, planning, budgeting and forecasting
Cons
* It is complex and costly system
* It is not suitable for small companies
* It lacks secrecy
* There high possibility of data manipulation
* It is based on past data and does not consider present situation
