Question

What is Accounting ?Discuss its advantages and disadvantages in a detailed manner?

Answer 1

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. it is a Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records,performing internal audits,reporting and analyzing financial information to the management, andadvising on taxation matters.

ADVANTAGES

• Financial information about business: Accounting makes available financial information ie. the profit earned or loss suffered and also what are the assets and liabilities of the enterprise.To provide information useful for the making economic decision.
• To serve primarily those users who have limited authority ability or resource to obtain information and who rely on the financial statement as their principal source of information about the economic activities of an enterprise.
• Facilitates comparative study: To provide information useful to investors and creditors for predicting comparing and evaluating cash flow in terms of amount timing and related uncertainty.
• To provide users with information for predicting comparing and evaluating the earning power of the enterprise.
• Assistance to Manager: The management responsible for the function of the business and has to, therefore, plan to make decisions and exercise effective control over the affairs of the business.The management performs these function on the basis of accounting information. To supply useful information in judgment the management ‘s ability to utilize enterprise resources effectively for achieving the primary enterprise goals.
• To provide factual and interpretive information about the transaction that is useful for predicting comparing and evaluating the earning power of an enterprise.
• Replace memory: No business man can remember everything about his business since human memory has limitation.It is necessary to record the transaction in the book of accounts promptly.There is no necessity of remembering various transaction since on need the records will furnish the necessary information.
• Facilitates loan: Loan is granted by the bank and financial institution on the basis of growth potential which is supported by the performance.Accounting makes available the information with respect to performance.

DISADVANATGES

Accounting is not fully exact: Accounting is influenced by the personal judgment in respect of various terms.People are bound to have different ideas and the estimates will naturally differ from person to person.Thus this will lead to the different amount of profit shown by a different person.Thus the profit cannot be treated as exact.

Accounting does not indicate the releasable value: The balance sheet does not show the amount of cash which the firm may realize by the sale of all assets.

Accounting ignores qualitative elements: Since accounting is confined to monetary matters only qualitative elements like a quality of management and labor force industrial relations and public relations are ignored.

Accounting ignores the effect of price level change: Accounting statement is prepared at historical cost.Money as measurement unit change in value. It does not remain stable.The financial statement does not show the effect of the change in price level.The assets remain to undervalue in many case particular land and building So while preparing financial statement accounting information will not show the true result.

Accounting may lead to window dressing: The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statement in a way to show better position than what it is actually.In this solution, income statement fails to provide a true and fair view of the result of the operation and the balance sheet fails to provide a true and fair view of the financial position of the enterprise.