If you have ever worked in a company, or understand how things work, then you must know what are the roles of things like income statements, cash flow statements, balance sheets, etc. Right? Well, these are the very things that come under Financial Accounting, where the organization or company not only records transactions to prepare these necessary reports or documents, but analyzes them, summarizes them, and presents them in the form of financial statements. This entire process is what we call financial accounting. But it might pop into your mind: what purpose does it serve, is it beneficial, and what are the downsides of it? Correct? Well, that’s the very reason why we are here with today’s post where we will go over all the possible advantages and disadvantages of financial accounting. Alright, here we go now.
Advantages of Financial Accounting
1. Keeping Things Organized
You see, financial accounting helps to record each business transaction chronologically and accurately. Detailed records help any organization maintain a proper arrangement of financial information for the operation of a business. With such close records, one can easily track his financial actions as a business and make sure that each transaction is recorded and can later be checked pretty easily. This method helps anyone to quickly find financial details, which is especially important for audits, filling out tax forms, and making plans for the future.
2. Catching and Preventing Fraud
Not the least of the advantages of financial accounting is the fact that it helps to detect and prevent fraud. Detailed and accurate records in all matters of money leave nothing to speculation or interpretation, you know? This way of doing things keeps fraud in check, for employees and managers know transactions are being watched very closely.
3. Checking How Well You’re Doing
See, to put it simply, financial accounting portrays how profitable the business is, how efficiently a business can deal with its debt, and how healthy its overall condition is through a balance sheet, income statement, and statement of cash flows. All these are important in presenting management with the opportunity to make wise decisions regarding where to put money, where to save, and what strategic moves may be considered next. Looking after these financial pointers gives a view of areas they need to improve and act upon to make their financial standings strong.
4. Creating Essential Financial Documents
Financial accounting is key in putting together important financial documents like balance sheets, income statements, and cash flow statements. But why? Well, such documents are crucial in presenting to investors, lenders, and government agencies the financial status of a company. With the correct financial statements, such individuals will, therefore, have the ability to make informed decisions regarding their transactions with the business.
5. Getting Loans Made Easier
This is particularly the case when it comes to businesses sourcing funds from outside their entity, for example, loans or credit lines. Indeed, banks and others issuing loans can rely on the details presented in financial statements to tell whether or not a company is good for a loan and how financially healthy it is. Having accurate and complete financial records also shows a company’s ability to handle debt and keep on making money, hence increasing the ease with which the company will have access to loans.
6. Evidence for Legal Matters
Accurate financial records are the main evidence in legal situations, which is pretty understandable. Properly prepared financial records assist in providing a clear, admissible record of the company’s financial activities if there are disputes with persons involved or if the regulatory requirements are not met, they are helpful in court cases. That kind of evidence will protect the company from court cases and help settle disputes effectively.
7. Helping Management Make Decisions
Financial accounting carries all valuable information useful in making strategic decisions at the firm. With the availability of these financial statements, it enables managers to point out trends and compare performance with standards in making well-informed choices in the use of resources, budgeting, and long-term planning. That’s the best way forward, right?
Disadvantages of Financial Accounting
1. Ignores Non-Financial Aspects
Financial accounting is just limited to measurable numbers, and in some cases, it sacrifices most other equally important factors such as market competition, economic climate, political scenarios, and technological changes. The absence of these non-financial elements may give a partial picture of what is really going on in the business, possibly leading to decisions that overlook key aspects affecting the company.
2. Potential for Manipulation
Even financial accounting, which is supposed to be extremely rigid in nature, is manipulated to a certain extent. Managers or accountants may manipulate figures in their favor to make their position appear better than it actually is. And this can lead the company to many legal troubles and that too real quickly.
3. Lacks Detailed Insights
See, while financial accounting gives an overall view of the financial position of the company, in most cases, the specific data needed for certain decisions may be missing. Thus, deep insight into the performance of individual departments, products, or services may remain hidden.
4. Based on Just Estimates
A significant part of financial accounting relies on estimates, for example, estimation of depreciation and anticipated losses from unpaid accounts. This considerably leads to inaccuracy since such estimations are based on guesses that are not totally correct at all times. After all, those are just that, the estimates, you know?
5. Stuck in the Past with Asset Values
Financial accounting often records the cost of assets at their original price, without adjusting for market changes over time. This can give the impression of the wrong value for company assets, making the financial reports misleading since it will not reflect the real state of company assets. It will actually also distort the true financial health of the company during those periods of high inflation or great market shifts, with the assets listed as either worth more or less than they really are.
Conclusion
All in all, financial accounting is one of the major and most important tools aka instruments within an organization that lets you know about the current financial standing of the company. So now you understand why it is pretty much essential for most of the companies out there to utilize financial accounting, right?
