Advantages and Limitation of Financial Accounting.

Advantages Financial Accounting.

Maintenance of business records: All financial transactions are recorded in a systematic manner in the books of accounts so that there is no need to rely on memory. Human memory is limited by its very nature. Accounting helps to overcome this limitation.

Preparation of financial statements: Systematic records enables the accountants to prepare the financial statements trading and profit & loss account to ascertain profit or loss during a particular accounting period and balance sheet to state the financial position of the business on a particular slate.

Comparison of results: Systematic maintenance of business records enables the accountant to compare profit of one year with those of earlier years to know the significant facts about the change.

Acts as Legal Evidence: Proper books of accounts maintained in systematic. manner act as legal evidence in case of disputes.

Facilitates Raising loans: Accounting facilitates raising loans from lenders by providing them required financial information.

Facilitates the Ascertainment of value of Business: Accounting facilitates the ascertainment of value of business’in case of transfer of business to another entity.

Assist the Management: Accounting assists the management in taking managerial decisions. For example, Projected Cash Flow Statement facilitates the management to know future receipts and payment and to take decision regarding anticipated surplus or shortage of funds.

Helps in taxation matters: Accounting facilitates the settlement of tax liability with the authorities by maintaining, proper books of accounts in systematic manner.

Facilitates control over Assets: Accounting facilitates control over assets by providing information regarding Cash Balance, Bank Balance, Stock Debtors, Fixed Assets, etc.

Limitation of Financial Accounting

Records only monetary transactions: Financial Accounting records only those transactions which can be measured in monetary terms. It has no place for recording non-monetary or non-financial transactions, though these matters also have a significant Tole in affecting the soundness of the business. For example, efficiency of the management, political situation, Government Policy, market competition etc. do affect the financial results and financial position of a business, but these are not at all recorded in accounting.

No consideration of price level changes: Accounting accepts the cost concept and hence does not consider the change in the price level from time to This is a very serious limitation of Financial Accounting.

No realistic information: Accounting information may not be realistic as accounting statements are prepared by following basic concepts. For example, Going Concern Concept gives us as idea that the business will continue and assets are to be recorded at cost but the book value, which the asset is showing, may not be actually realizable.

Personal bias of accounting affects the accounting statements: Accounting statements are influenced by the personal judgement of the account.­ He may select any method of depreciation, valuation of stock, and treatment of deferred revenue expenditure. Such judgement is based on integrity and competence of the accountant, and will affect the preparation of accounting statements.

Window dressing in Balance Sheet: When an accountant resorts to ‘window dressing’ in the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of affairs of the business.

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