Advantages and Limitations of Accounting – SS1 Financial Accounting Lesson Note (First Term)

Some advantages of accounting include:

i. It helps in having a complete record of business transactions.

ii. It gives information about the profit or loss made by the business at the close of a year and its financial conditions.

iii. It provides useful information for making economic decisions.

iv. It facilitates a comparative study of the current year’s profit, sales, expenses etc with those of the previous years.

v. It provides users with factual and interpretive information about transactions and other events which are useful for predicting, comparing and evaluating the enterprise’s earning power.

vi. It supplies information useful in judging the management’s ability to utilise enterprise resources effectively in achieving primary enterprise goals.

vii. It helps in complying with certain legal formalities like filing of income – tax and sales tax returns. If the accounts are properly maintained the assessment of taxes is greatly facilitated.

viii. Ascertainment of assets and liabilities.

1. Ascertainment of financial position.
2. Planning purpose.

Limitations of accounting 

1. Accounting is historical. It does not reflect the current financial position or worth of a business.
2. Transactions of a non-monetary nature do not find a place in accounting. Accounting is limited to monetary transactions only. It excludes qualities elements like management, reputation, employee morale, and labour strikes.
3. Facts recorded in financial statements are greatly influenced by accounting conventions and personal judgements of the accountant or management.
4. Accounting principles are not static or unchanging – alternative accounting procedures are often equally acceptable.
5. Cost concept is found in accounting price changes are not considered.
6. Accounting statements do not show the impact of inflation.
7. The accounting statement does not reflect those increases in non-asset values that are not considered realized.