Advantage 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 reply 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 and 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 date.
Comparison of result: Systematic maintain of business record enables the accountant to compare profits 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 matter: 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, thought these matter also have a significant role in affecting the soundness of the business for example, efficiency of the management, political situation, Government Policy, market competition etc. do effect the financial result 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 time. This is a very serious limitation of financial accounting.
No realistic information: Accounting information may not be realistic as accounting statement are prepared by following basic concepts and conventions. 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 statement are influenced by the personal judgement of the accountant. 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 statement.
Window dressing in balance sheet: When an account resorts to window dressing in the balance sheet the balance sheet can not exhibit the true and fair view of the state of affairs of the business.