Every business wants to keep track on its financial progress, they want to know if they are on the profiting side or if they are provoking losses, it is also of particular interest to them to know if their investment is yielding profits or on the decrease. This is where accounting plays a role by recording, organising and giving details of financial transactions that are carried out by a business.
However it has some downsides too and in this article, we will study the pros and cons associated with accounting.
Pros of Accounting
Keeping Business Records
Due to the size and bulkiness of transactions done in a year by a business, it is rather impossible to remember every one of them. Accounting helps to concisely record these transactions.
Financial Statements Preparation
Accounting keeps a concise record of all financial transactions and this is essential in preparing financial statements for every business.
For each year a proper record of financial transaction is documented, comparison can be made of a year’s financial result with another. Also, accounting helps an entity to analyze all the transactions according to its policies.
Proper record of financial transactions of a business helps the management to make decisions and plans relating to budgets and so on.
Evidence in Legal Affairs
Systematic and precise records of financial transactions can stand as a piece of evidence in the court of law.
Cons of Accounting
Expresses Accounting Data in Terms of Money
Accounting doesn’t include non-financial transactions. Only financial transactions are measurable. Financial transactions are only expressed monetarily.
Accounting Data is Based on Estimates
Estimations are typical in accounting, hence error is also common.
Value Change of Money the Measurement Unit
It is impossible for money (the measurement unit of accounting) to stabilize. If these price level changes are not put into consideration while accounting, it won’t be possible to get accurate financial status of a business.
Fixed Assets are Recorded at the Original Cost
Due to the shift in technology, efflux of time and so on, the original cost can vary with the current cost of a fixed asset. This can hinder the balance sheet from showing the genuine financial situation of an entity
Accounts Can Be Manipulated
Accounting results are not entirely genuine as the records can be manipulated and can misinterpret the profit of a business.
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