Advantages and Limitations of Accounting

Accounting: Objectives, Advantages and Limitations of Accounting – Important 2024

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Objectives, Advantages, and Limitations of Accounting

Accounting is the systematic process of recording, analyzing, and interpreting financial transactions and events of a business entity. It involves maintaining accurate records, summarizing financial information into statements, and communicating this information to various stakeholders for decision-making and control purposes. Here is the list of Objectives, Advantages and limitations of accounting.

OBJECTIVES OF ACCOUNTING

The main objectives of accounting are:

1. To maintain a systematic record of business Transactions:

The main objective of accounting is to identify the financial transactions and events of the business and to record them into proper books of accounts in a systematic manner. This process involves identifying each transaction and systematically classifying them accordingly (e.g. sales, purchase, expenses, revenue etc.) then recording them in a well-structured manner in the firm’s books of accounts. 

2. To ascertain Profit or Loss:

The next fundamental objective of accounting is to determine the financial performance of the firm over a specific period (usually a fiscal year), i.e. profit earned or loss incurred by the business during a particular period. In order to determine whether the organization has incurred profits or losses, the calculation is shown in a structured format in the Trading and Profit and Loss Account or Statement of Profit and Loss Account (Income statements of companies). Financial statements are usually formed at the end of year.

3. To determine Financial Position:

Accounting also aims to determine the financial position of the organisation and its health at a particular point in time. Financial Position can be identified in the Balance Sheet, which states the position of assets, liabilities, and capital at a particular point of time.

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4. To provide information to various users:

Another objective of accounting is to communicate the accounting information to various interested parties like owners investors, creditors, employees, government authorities, etc. Such information helps them in making sound decisions about the business entity.

5. To assist the Management:

Another objective of accounting is to provide financial information to the management. Management requires it for decision-making and for exercising effective control. owners. Accounting players an important role in empowering the managers in order make important decisions effectively and efficiently in the favor of the business and help in the growth of the organisation. 

Advantages and Limitations of Accounting

The main advantages of accounting are:

  1. Provides Information about Financial Performance: Accounting helps in providing information about the Financial Performance, i.e. net results of business activities of an accounting period.
  1. Provides assistance to Management: Accounting provides information about the financial performance and financial position of the business, which is needed by the management for planning and controlling the business.
  1. Facilitates Comparative Study: By keeping a systematic record of the business transactions, accounting helps in making comparisons. • It facilitates Intra-firm Comparison’, i.e. comparison of the financial performance of an enterprise for two or more accounting periods. • It also facilitates ‘Inter-firm Comparison’, i.e. comparison of financial results of one firm with that of another.

Also Read:  30 transactions with their Journal Entries, Ledger, Trial balance and Final Accounts- Project

  1. Replaces Memory: Accounting helps in maintaining systematic records of the business, which may be referred to from time to time. Thus, accounting eliminates the need to remember the transactions.
  1. Helps in settlement of Tax Liability: Properly maintained accounting records are helpful in the settlement of various tax liabilities.
  1. Helpful in Raising Loans: Accounting facilitates raising loans from banks or other financial institutions as such institutions grant loans to firms on the basis of appraisal or financial statements of the firm.
  1. Evidence in Court: Systematic accounting records provide documentary evidence m the court in case of any dispute.
  1. Helps in the Sale of Business: If the business entity is being sold, then the accounting records help to determine the proper purchase price.

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  1. Helpful in Decision Making: Management has to take a number of decisions at regular intervals. Accounting provides useful information to the management for taking such decisions.

Advantages Limitations of Accounting

Accounting also has some limitations. These are as follows:

  1. Accounting is not Fully Exact: Accounting is not completely free from personal bias or judgment. • Although transactions are recorded on the basis of some documentary evidence, but even then, in some cases, the transactions are recorded on the basis of some estimates. • For example, estimates for possible bad debts or depreciation on the basis of the estimated useful life of an asset. • In making such estimates, we need personal judgment. As there is no uniformity for making such estimates, the figures of profit or loss may vary if calculated by different persons.

Objective, Advantage, and Limitations of Accounting

  1. Accounting does not Indicate the Realisable Value: Accounting is ‘Historical’ in nature, i.e. it records the assets at their original cost (historical cost) less depreciation and does not reflect their current market value. As a result, the Balance Sheet does not indicate the amount of cash that the firm may realize by the sale of assets.

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  1. Ignores Effect of Price Level Changes: Accounting statements are prepared at historical cost (i.e., the original cost). However, the value of money change from time to time. As a result, figures given in the financial statements ignore the price level changes. Due to this reason, Balance Sheet values of assets are not helpful in estimating the true financial position of the business.
  1. Ignores the Qualitative Information: As Accounting is concerned only with the monetary transactions of the business, it ignores the qualitative aspects, like good labor relations, management’s reputation, etc.
  1. Affected by Window Dressing: Window dressing refers to the practice of manipulation of accounts to present a more favorable position of the business than the actual position. For example, treating revenue expenditure as capital expenditure or vice versa. In such a situation, financial statements fail to provide a true and fair view of the financial position of the enterprise.

So these were some Objective, Advantages and Limitations of Accounting. Hope all the information here will be helpful in a positive manner.

 

Also Read:  Basic Accounting Terms – 23 Important terms

JK Bhardwaj