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Advantages and Limitations of Accounting

The document discusses the advantages and limitations of accounting. The main advantages are that accounting helps management with planning and control, provides a record of transactions, and aids with legal and tax matters. However, accounting only records monetary values, may be based on estimates, and does not account for inflation or changing money values.

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Divisha Agarwal
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1K views3 pages

Advantages and Limitations of Accounting

The document discusses the advantages and limitations of accounting. The main advantages are that accounting helps management with planning and control, provides a record of transactions, and aids with legal and tax matters. However, accounting only records monetary values, may be based on estimates, and does not account for inflation or changing money values.

Uploaded by

Divisha Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ADVANTAGES OF ACCOUNTING:

The main advantages of accounting are:

Assistance to management: The accounting information helps the management


to plan its future activities by preparing budgets in respect of sales, production,
expenses, cash, etc. Accounting helps in coordination of various activities in different
departments by providing financial details of each department. The managerial
control is achieved by analysing in money terms the departures from the planned
activities and by taking corrective measures to improve the situation in future.

Records rather than memory: It is not possible at all to do any business by just
remembering the business transactions which have grown in size and complexity.
Transactions, therefore, must be recorded early in the books of accounts so that
necessary information about them is available in time and free from bias.

Intra - period comparisons: Accounting information when recorded properly can


be used to compare the results of one year with those of previous year(s).

Aid in legal matters: Systematically recorded accounting information can be


produced as evidence in a court of law.

Help in taxation matters: Income tax and sales tax authorities could be
convinced about the taxable income or actual turnover (sales), as the case may be,
with the help of written records.

Sale of a business: In case, a sole trader or partnership firm or even a company


wants to sell its business, the accounting information can be utilised to determine
proper value of the business.

Advantages of Accounting:

 Accounting helps to maintain the business records in a systematic manner.


 It helps in the preparation of financial statements.
 Accounting information is also used to compare the result of current year with the
previous year to analyze the changes.
 It helps the managers in the decision making process.
 It provides information to other interested parties such as shareholders, creditors,
investors, customers, government, employees, regulatory bodies etc.
 It helps in taxation matter
 Accounting information can be produced as evidence in the legal matter.
 It helps in valuation of business.

Limitations of Accounting

 The items expressed in monetary terms are recorded in the accountings where as the
items which are nonmonetary nature not recorded.
 Sometimes accounting data are recorded on the basis of estimates and which could be
inaccurate.
 Fixed assets are recorded as the original cost.
 Value of money does not remain stable so accounting value does not show true financial
results.
 Accounting can be manipulated and biased.

LIMITATIONS OF ACCOUNTING:

Accounting suffers from the following limitations:

Accounting information is expressed in terms of money. Non - monetary events


or transactions, however important they may be, are completely omitted.

Fixed assets are recorded in the accounting records at the original cost, that is,
the actual amount spent on them plus, of course, all incidental charges. In this way
the effect of inflation (or deflation) is not taken into consideration. The direct result
of this practise is that balance sheet does not represent the true financial position of
the business.

Accounting information is sometimes based on estimates which are often


inaccurate. For e.g., it is not possible to predict with any degree of accuracy the
actual useful life of an asset for the purpose of depreciation expense.

Accounting information cannot be used as the only test of managerial


performance on the basis of more profits. Profit for a period of one year can readily
be manipulated by omitting such costs as advertisement, research and development,
depreciation, etc.

Accounting information is neither neutral nor unbiased. Accountants calculate


income as excess of revenue over expenses. But they consider only selected
revenues and expenses. They do not include cost of items like, water or air pollution,
employee's injuries, etc.

Accounting like any other discipline has to follow certain principles which in
certain cases are contradictory. For e.g., current assets are valued on the basis of
cost price or market price whichever is less following the principle of conservatism.
Accordingly the current assets may be valued on cost basis in some year and at
market price in another year. In this way, the rule of consistency is not followed
regularly.

Limitations of Accounting

 The items expressed in monetary terms are recorded in the accountings where as the
items which are nonmonetary nature not recorded.
 Sometimes accounting data are recorded on the basis of estimates and which could be
inaccurate.
 Fixed assets are recorded as the original cost.
 Value of money does not remain stable so accounting value does not show true financial
results.
 Accounting can be manipulated and biased.

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