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Theoretical Framework of Accounting

Merits and Demerits of Accounting

Some of the advantages of accounting are Maintenance of business records, Preparation of financial statements, Comparison of results, Decision making, Evidence in legal matters, Provides information to related parties. Let us discuss the advantages and disadvantages of accounting in greater detail.

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Advantages and Disadvantages of Accounting

Stakeholders of an entity want to know whether the entity is earning a profit or incurring losses. They also wish to know whether the capital investment in the business is increasing or decreasing during the accounting period.

Accounting is a mixture of art and science. Accounting is an art of recording, classifying and summarizing financial transactions in a significant manner and in terms of money.

Advantages and disadvantages of accounting

Advantages of Accounting

  • Maintenance of business records
  • Preparation of financial statements
  • Comparison of results
  • Decision making
  • Evidence in legal matters
  • Provides information to related parties
  • Helps in taxation matters
  • Valuation of business
  • Replacement of memory

Browse more Topics under Theoretical Framework Of Accounting

Maintenance of business records

It records all the financial transaction pertaining to the respective year systematically in the books of accounts. It is not possible for management to remember each and every transaction for a long time due to their size and complexities.

Preparation of financial statements

Financial statements like Trading and profit and loss account, Balance Sheet can be prepared easily if there is a proper recording of transactions. Proper recording of all the financial transactions is very important for the preparation of financial statements of the entity.

Comparison of results

It facilitates the comparison of the financial results of one year with another year easily. Also, the management can analyze the systematic recording of all the financial transactions according to the policies of the entity.

Decision making

Decision making becomes easier for management if there is a proper recording of financial transactions. Accounting information enables management to plan its future activities, make budgets and coordination of various activities in various departments.

Evidence in legal matters

The proper and systematic records of the financial transactions act as evidence in the court of law.

Provides information to related parties

It makes the financial information of the organization available to stakeholders like owners, creditors, employees, customers, government etc. easily.

Helps in taxation matters

Various tax authorities like income tax, indirect taxes depends on the accounts maintained by the management for settlement of taxation matters.

Valuation of business

For proper valuation of an entity’s business accounting information can be utilized. Thus, it helps in measuring the value of the entity by using the accounting information in the case of sale of the entity.

Replacement of memory

Proper recording of accounting transactions replaces the need to remember transactions.

merits and demerits of accounting

Disadvantages of Accounting

  • Expresses Accounting information in terms of money
  • Accounting information is based on estimates
  • Accounting information may be biased
  • Recording of Fixed assets at the original cost
  • Manipulation of Accounts
  • Money as a measurement unit changes in value

Expresses Accounting information in terms of money

Non-financial transactions cannot be given effect to in books of accounts. Only transactions of financial nature are measurable by the accountant. In fact, financial transactions are expressed in terms of money.

Accounting information is based on estimates

There are some accounting data which are based on estimates. Thus, inaccuracy in estimates is possible.

Accounting information may be biased

Accountants personal influence affects the accounting information of the entity. Different methods of inventory valuation, depreciation methods, treatment of revenue and capital expenses etc can be adopted by the accountant for measurement of income of the entity.

Hence, the income arrived in certain cases might be incorrect due to the lack of objectivity.

Recording of Fixed assets at the original cost

There can be a difference between the original cost and current replacement cost of a fixed asset due to efflux of time, change in technology etc. Thus, the balance sheet may not show the true financial status of an entity.

Manipulation of Accounts

The accountant or management can manipulate or misrepresent the profits of an entity.

Money as a measurement unit changes in value

Stability in the value of money is not possible. Accounting information will not show the true financial position if changes in the price level are not considered.

Solved Example for You

Question: What are the functions of accounting?

Ans: The functions of Accounting are:

  1. Keeping systematic records
  2. Protecting and properly controlling properties of the business
  3. Ascertainment of profit or loss
  4. Ascertainment of the financial position of the business
  5. Facilitating decision making

 

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