Be it large corporations or a freelancer, finance is the backbone of their operations. That’s where accounting is used to record, organize, and understand financial information. In other words, it points to a financial state which can include profit or loss, the current value of assets and liabilities, and cash flow. It is also known as the language of businesses and that’s for a reason. Accounting provides crucial information to owners, managers, investors, and other stakeholders to help them evaluate financial performance and make informed decisions.
All these assist in ameliorating business processes. Now that we have covered the brief overview of accounting, it’s time we explore its advantages and disadvantages.
Advantages of Accounting
Accounting is employed for maintaining and expanding the financial health of businesses. The following is a list of some notable benefits accounting brings.
It helps in preparing financial statements
Preparing a financial statement is essential as it provides information regarding the ability of the business to meet its short-term and long-term financial obligations. Accounting helps prepare financial statements that summarize the past performance and current financial condition of the business.
This includes income statements, balance sheets, and statements of owner’s equity and cash flow. Furthermore, it follows accounting principles for accurate financial reporting.
Accounting measures the valuation of the business
Measuring the business valuation provides a comprehensive knowledge of assets. Accounting calculates the true and fair valuation of businesses. It gives accurate numbers that help business owners obtain insurance coverage.
Alongside, it provides true company value that is useful in the case of selling, acquisitions, or mergers. Additionally, when businesses seek funds for growth, it attracts potential investors by providing them with a full company valuation report.
It assists management
Accounting is essential for effective management as it determines the performance of the business. It provides management with proper feedback on the financial status of the businesses. This further helps in creating budges and tracking the efficiency of various business activities. Additionally, it provides and analyses monthly financial statements that allow management to work with present-day data.
Accounting facilitates decision-making
Along with effective management, accounting enables decision-making. It conducts relevant cost analysis helping management explore all possibilities to make better and evidence-based decisions. Moreover, it aids in analyzing the cost-effectiveness of each operational choice to make effective operational decisions. It monitors and tracks performances, assisting management further in making real-time strategic decisions.
Most importantly, accounting gives an understanding of the current financial state and tracks financial tendencies to make plans for the future of the business.
It helps with taxation
Businesses are required to comply with the tax law. Accounting is used to prepare tax returns and tax payments. Simply put, funds that come into the business and go out are tracked for taxation purposes. Accounting ensures that the tax-related finances of the business are in check legally. Further, it helps them prepare for the tax-paying season in advance. Failing to abide by the up-to-date tax laws will put businesses in legal trouble. Ergo, accounting is crucial in ensuring businesses comply.
Disadvantages of Accounting
As it is said, you have to take the good with the bad. With that in mind, here’s the list of several downsides of accounting.
It only records quantitative transactions
Accounting is all about money, so only the quantitative aspect of the transactions is documented while the qualitative ones are ignored. This is to say that only those events that can be expressed in terms of money are included in the accounting. Whereas, the non-monetary events are left unregistered.
Because of this, numerous items are never reflected in the financial statements of the company, making it a major drawback of accounting.
Accounting may be based on estimates
Like any other system, accounting uses assessments to make financial reports more complete. This means it includes events that are considered probable but in reality are merely anticipated. Even though the estimated data is revised as more information is available, some details may still be inaccurate. To summarize, when providing exact numbers is impossible or impractical for accounting, estimates are used. However, they must be improved continuously.
It ignores price fluctuation
The price instability is not taken into consideration in accounting. Instead, the historical costs are operated on to measure the value. This leaves factors such as inflation and price change out of the records. Additionally, accounting does not consider the market value of assets. Even the value of fixed assets changes over time.
Sometimes the difference between the original cost and replacement cost is massive, and it is left out in accounting. Also, the value of money is not stable, making it more difficult to represent true financial results.
Accounting does not support forecasting
Accounting prepares financial statements and the records show the position of the company on the date of preparation. The investors are interested in the short-term and long-term future of the company whereas accounting provides no future assessment. Plus, companies operate in a dynamic business environment, where accounting records past events. To clarify, there is no accounting system for future events, unfortunately. It only deals with past data and not with what may be.
It may fail to reveal the true financial statement
One of the notorious limitations of accounting is that it can be manipulated. Firstly, financial statements are influenced by the personal judgment of the accountants. For instance, take the method of inventory valuation and the method of depreciation. Depending on the skills, competence, integrity, and experience, accountants make judgments on the true value of items.
In some cases, assumptions may be false due to mistakes on the accountant’s end. Whereas, in other cases, it can be intentional to distort reality.
Also, accounting is done by humans, meaning the occurrence of human errors is inevitable. The situation where accounts are manipulated to cover frauds is hard to detect when done purposefully. Mostly, meeting sales or revenue goals is the common motivation behind manipulating financial statements. Either way, it becomes an extreme limitation of accounting.
An overview of the advantages and disadvantages of accounting
| Aspect | Advantages of Accounting | Disadvantages of Accounting |
|---|---|---|
| Financial Statements | Helps in preparing financial statements accurately. | Ignores qualitative aspects of transactions, focusing only on quantitative aspects. |
| Business Valuation | The true and fair valuation of businesses can be measured. | May rely on estimates, which can be inaccurate. |
| Management Support | Provides feedback on financial status for effective management. | Does not support forecasting or future assessments. |
| Decision-Making | Also, possibl to facilitate the evidence-based decision-making for management. | Fails to provide insights into the future of the business. |
| Tax Compliance | Tax preparation and compliance with tax laws. | Change for failing to reveal the true financial statement if manipulated. |
How to be a good Accountant?
Accounting is one of the most popular professions right now. Also, professional accountants are paid very well in the industry. If you have made up your mind about entering this profession, you would like to have a look at these skills a good accountant must possess.
Good With Numbers
Now, this one is obvious. It is true that accountants deal with numbers, but not all accountants are good with numbers. The basic requirement of becoming a good accountant is to be good with mathematics. It is important to learn basic mathematics skills that will help you to analyze the numerical information in front of you. Using your mathematical skills, you will be able to draw conclusions much faster and even make fewer mistakes.
Eye for Detail
Many people assume that having good mathematical skills is the most essential requirement for becoming a good accountant, but paying attention to details is just as important. A lot of numbers can be really confusing sometimes, but that is when you need to separate what really exists and what is going on in your mind.
When you become an accountant, you will have to deliver the work before the deadline. During those scenarios working under pressure, it is possible to end up making minor mistakes that can make a huge impact on your career. Having a good eye allows you to not make any errors during financial reporting.
Computer Skills
As an accountant, the computer is your best friend. The digital age has surely made life easier for those accountants who have good computer skills. The computer helps an accountant to organize their numbers, proofread their reports, and calculate things in a short amount of time.
During your work, you will be presenting the reports to senior management and other stakeholders. At that time, it is your responsibility to narrate the work and communicate with others effectively. Your other job is to narrate the numbers in a way others are able to understand.
Business Awareness
It may not be the first thing that appears in your mind when you start working as an accountant, but it is important to be aware of the business you are working for. You should know the events that are affecting your business directly or indirectly.
You should also know if the business is going up and down and by how much. It helps you narrate your ideas effectively to the management whenever you create a report regarding the company. Also, as an accounting manager, make sure you are aware of the government rules and regulations affecting your business. You should also keep an eye on the upcoming market trends that can help your company reach new heights.
Some more tips to be a great accountant
While the above tips might help, there are more to being the best accountant in the world. These tips might help you.
- Mastering Math: An accountant should be best buddies with numbers. A firm understanding of math forms the backbone of their role, enabling them to perform accurate calculations and data analytics.
- Eye for Detail: It’s equally important to pay meticulous attention to minutiae. In the complex world of finance, numbers can be deceptive, but an effective accountant can discern truth from illusion.
- Digital Proficiency: Given our digital age, computer literacy is a necessity. Accountants harness technology to manage data, quality-check reports, and expedite calculations.
- Communicative Skills: Accountants aren’t just about crunching numbers; they’re also narrators. The ability to communicate effectively is instrumental in breaking down complicated financial information into digestible bits.
- Business Insight: Comprehending the business you serve is vital. Being aware of external factors that can impact your company, along with staying abreast of market trends, can enhance the depth of your reports.
- Regulatory Knowledge: Compliance with governmental regulations isn’t optional. Accountants need to be familiar with the legal terrain that influences their businesses.
- Proficiency in Financial Statements: Creating accurate financial statements is an accountant’s staple. These reports encapsulate a company’s fiscal health and demand painstaking attention to detail.
- Judgment Skills: Accountants are not only calculators; they’re decision influencers. They offer essential insights to guide informed decisions within the organization.
- Estimation Prowess: When precise figures aren’t available, estimation skills come to the rescue. A competent accountant can make educated approximations when needed.
- Ethical Commitment: Preserving ethical norms is of utmost importance. Accountants are obliged to safeguard the honesty of financial reporting and act with complete transparency.
- Adaptability: Since the business environment continually evolves, accountants must adapt accordingly. Their flexibility enables them to navigate fluctuating market conditions.
- Lifelong Learning: Keeping updated with ever-changing accounting standards and technologies is a pledge. To thrive in their field, accountants should commit to ongoing learning.
In order to be a good accountant, you are required to do something extra that others are not doing in the same field. It will help you grow quickly and will also take you to a better place.
Sources
- American Institute of CPAs (AICPA): Professional organization for accountants in the United States.
- International Financial Reporting Standards (IFRS): IFRS is a globally recognized set of accounting standards.
- U.S. Securities and Exchange Commission (SEC): SEC’s website is a valuable resource for information on regulatory requirements, financial reporting, and updates related to publicly traded companies.
- Institute of Management Accountants (IMA): Association for management accountants.