Advantages and Disadvantages of Financial Accounting
Today the world is changing at a very rapid phase, and in this changing world economy of the country plays a very important role. Due to advancements in the economy, the nation easily provided all the goods and services, making everything very easy to do. With the help of different economic tools, anyone can raise their standard of living. Also, due to the selling of goods and services, the nation can easily progress because it increases its economic activity.
And if the national economy is running progressively, then it ultimately benefits humanity. Out of the several economic instruments, the most notable development that has shaken the world is the business's financial accounting. Day by day, the use of goods and services is increasing, and now financial accounting can perform various functions that were performed by the traditionally developed instruments in earlier times.
Financial accounting helps companies or manufacturers by providing easy solutions such as keeping proper records. Consumers' behavior is now shaped according to their needs, and companies have to develop those products in demand. And for developing new products they have to do accounting. Accounting helps them to keep proper records of transactions. The development of financial accounting as an economic concept is notable in human history. The development of a consumer-friendly market is the biggest achievement in the economic field.
Now in today's times, everything is directly or indirectly related to the economy of the nation. Almost all fields currently frame policies and design their products by keeping focused profits. Numerous other types of economic instruments are prevalent at the current time. Their basic aim is to earn profits, and they provide goods and services easily. In the recent context, we witnessed COVID-19, which poses challenges not only to health but continuous lockdown affects the economy of the countries too. In this article, we will discuss one of the economy's instruments: financial accounting. With the help of proper financial accounting, manufacturers or companies can keep their proper records of functioning.
What is Financial Accounting?
Financial accounting is an economic instrument used to record financial information and analyses to determine the company's financial position. It is a long process that involves recording, summarizing, analyzing, and presentation of all financial transaction records of business in the form of financial statements. Financial accounting uses various types of statements, like income statements, cash flow statements, balance sheets, etc. Companies prepare these financial statements routinely and present them to all their stakeholders. Financial accounting's primary aim is to deliver a fair and accurate image of the company's financial affairs to all its stakeholders. Financial accounting is done according to the rules set by higher officials.
Financial accounting is a very important tool in the company's management because it helps in decision-making by providing financial reports. Financial accounting is also used for understanding the forecasting purpose of the company. Financial statements involve several aspects of business in financial accounting, such as expenses, revenue, asset, equity, and liability.
Financial accounting is crucial as it increases the company's profitability and efficiency. It is statutorily required to practice financial accounting in their operations by every business organization.
Characteristics of Financial Accounting:
1. Systematic record of transactions -
The basic objective of financial accounting is to keep a systematic record of all company transactions. And after doing that, it can be used to analyze the company's financial condition.
2. Ascertainment of the result of the above-recorded transactions-
By using financial accounting, the company's accountant is used to prepare the profit and loss of the company. If the expanses exceed the revenue, the business is running low. So by using financial accounting, companies can increase their profits by making a shift in policy making.
3. Ascertainment of the financial position of the business-
The role of financial accounting is not only to create financial statements for the company but also to understand the business's financial position. It helps to understand the assets and liabilities of the company.
Advantages of Financial Accounting:
Numerous advantages of financial accounting contributed to making it one of the most notable economic tools. Financial accounting is very important for any business because it captures the wholesome development of the business. It involves several financial statements of the business; by using these statements, companies can form their policies.
Some of the most discussed advantages of financial accounting are-
1. Financial accounting used in the prevention and detection of fraud:
Today, the world is changing rapidly, and in this changing world, data is very important. Everything is directly or indirectly related to the usage of data. Data is the backbone of any policy. With the increase in the population, companies require lots of data for the formulation of policies. To keep the proper records of transactions, financial accounting is used. Financial accounting has numerous advantages which directly or indirectly benefit the company.
One of the best uses of financial accounting is in preventing and detecting economic fraud in the company. Financial accounting is used to detect fraud or errors in the company's transactions. The management uses financial accounting to understand their records of transactions better. And this analysis of records through the use of financial accounting is very beneficial for the company as it helps to track the errors of the company and assist in managing these errors.
2. Financial Accounting helps in presenting the true financial position of the company:
Profit is the main driver behind any decision. The financial position of any organization is defined as the company's resources and how they can be used to gain more profits. And to make a policy that increases the company's financial position is necessary. So financial accounting is very necessary for any business because it helps to understand the actual position of the business. Financial accounting helps companies to reveal and freely interpret the true financial position of the Organization.
Financial accounting keeps the proper records of all the transactions and supplies to internal management from time to time. After getting the company's true financial position, the internal management decides to form a policy accordingly.
Higher authorities get the real ideas of all financial resources of the Organization regularly with the data supplied by financial accounting. And this data helps them make proper decisions for managing the overall financial position of an organization.
3. Financial accounting helps in maintaining proper business records:
The primary aim of any organization is to provide basic goods or services to its consumers and earn profits as much as it can. To earn profits, they keep the proper input and output spending records. In other words, formulating policies related to the company is driven by profit. And to make policy accordingly then, there is a requirement for financial accounting. Financial accounting helps the Organization to keep the proper records of all the transactions of the Organization. And these transaction records are used to formulate the policies of the Organization.
Under financial accounting, a proper record book is maintained to keep the receipt of all the necessary transactions. Every input expenditure and output earning is mentioned in the record book. And this book provides the actual position of the Organization. Financial accounting is very useful because when we talk about human memory, it has a limited capacity to remember things, so humanity cannot keep records of every transaction of an Organization. So financial accounting is used to keep a large amount of transaction data properly without any hindrances.
4. Financial accounting helps in preparing financial statements:
There are numerous types of statements used in the Organization. And these statements are very necessary for the company because it keeps the records of all the transactions properly. Every statement has its advantage because it keeps the true record of the Organization's profit or loss and presents the company's real worth. The financial accounting department supplies all the necessary documents or data to prepare company statements.
In the Organization, the balance sheet is of very importance. The company's balance sheets are to maintain the proper check over its usage of resources. In balance sheets, errors are detected, and this helps the companies to avoid these errors.
Disadvantages of Financial Accounting:
In the above paragraphs, we discussed some of the most notable advantages of financial accounting and how it assisted organizations in achieving their desired targets. Despite being one of the most used economic instruments, it has several drawbacks. And these drawbacks proved to be a disadvantage for the Organization. On several occasions, it was found that financial accounting has different types of errors and these errors are used to manipulate the actual records of the company's transactions.
Some of the most notable disadvantages of financial accounting are-
1. Financial Accounting Records Only Financial Aspects:
The Organization is not only driven by profit or, in general, by financial resources. Numerous pillars contribute to making a venture a true organization. Organizations require certain tools and instruments to generate huge profits and increase their customer base. And to increase the profit or customer base, the Organization has to work on several tools and aspects. The foremost disadvantage of financial accounting is that it only considers the monetary transaction of the company, leaving behind several other types of important tools.
Financial accounting, while accounting only focuses on the monetary transaction and does not consider other nonfinancial aspects. Financial accounting doesn't include the level of market competition, prevailing economic conditions, political situation, government rules, and regulations, etc. So only focusing on the monetary aspects presents a partial picture of the company working because all these factors greatly influence the functioning of organizations.
2. Financial Accounting is Historic in Nature:
Financial accounting is one of many daily tasks but a long process that started from the inception of the Organization. The second most discussed disadvantage of financial accounting is its historic nature. It means it provides data from previous days and, on that basis, current policies form. It generally provides data from past activities, which is less important for the current time.
If the Organization's management needs daily data for policy formulation, they are stuck with some doubtful records. Because at the end of the period, financial accounting properly provides records of transactions. Based on the historical data provided by the financial accounting, the Organization's current policies are formed and sometimes need to be more suitable for the Organization's current development. So it is better to keep day-to-day and historical data together to formulate the Organization's policies.
3. Financial Accounting May Provide Insufficient Information:
Financial accounting's main focus is to keep the proper records of all monetary transactions. Also, along with monetary transactions, it keeps records of assets, liabilities, profits, products, etc. But the records provided by the financial accounting need to be revised. It needs to provide detailed information about the departments, products, processes, services, or any other activity within the Organization.
It only presents data regarding the Organization's assets, liabilities, profit, and loss. They generally provide data wholesomely if management requires separate data related to specific activities they cannot provide. The non-availability of separate data related to specific activities that management may require for decision-making proved a disadvantage to organizations.
4. Information can be Manipulated:
Another drawback of financial accounting is that their information can be manipulated. Information can be manipulated to provide additional benefits to some specific shareholders of the Organization. Sometimes it was observed that management accountable for the financial accounting manipulated the information as per the desire of higher management. And this manipulation of information can change the actual figures of the Organization and can be presented in a misappropriated manner for their vested interest.
Profit may be shown high by them to attract equity shareholders, or they may reduce it to evade tax. Several times it was observed that by manipulating the records of transactions, big organizations attract large numbers of investors. Several scams in the news represent the truth that the Organization, by using faulty audit mechanism, attract investments.
Like a coin, everything has two sides, so before using any instrument, it is necessary to look at every possible aspect. Financial accounting has several advantages and disadvantages, but it is one of the most important tools required for the company. The Organization must achieve more profits, and at the same time, by keeping the proper records, it maintains checks and balances.