Accounting, as we know is the systematic record of all business transactions of financial nature with a view to understand the result of the business, review the economic situations and to interpret the performance. Various advantages from accounting may be summarized as under:
- Replacing memory: Business transactions are innumerable, varied and complex, as such it is quite impossible to memorize each and every transaction. Accounting records these transaction in writing and thus it is not necesary that the businessman should memorize all the transactions.
- Assessing the performance of the business: Accounting keeps proper and systematic record of all business transactions. Income statements are prepared with these records and we are able to know the profit earned and the loss suffered by the business. Trading Accounts is prepared to find out Gross Profit or Loss of the enterprise. Net profit can be known by preparing Profit and Loss Account.
- Assessing the financial status of the business: Financial position of the business is displayed through position statement i.e., Balance Sheet of business. This statement is prepared at the end of the accounting year and reflects the true position of assets and liabilities of the business on a particular date.
- Documentary evidence: Accounting records can also be used as an evidence in the court to substantiate the claim of the business. These records are based on documentary proof. Every entry is supported by authentic vouchers. This is why, the court accepts these records as evidence.
- Assisting in realization of debts: We, in 'Accounts' prepare personal ledger accounts of all the parties. The personal account shows the exact amount due form the debtors. We can send the debtors their statement of accounts and thus enable them to verify entries and also to make early payment of the amount due. The account can also be used to prove the claim of the business against the debtors int he court.
- Facilities the sale of business: The position statement of the business shows the value of assets and liabilities of the business. We can calculate the 'Net Worth' of the business on the basis of these statements. Accounting facilitates in the calculation of the consideration for which the business should be sold.
- Preventing and detecting frauds: The proper accounting system and effective arrangement of internal check prevents leakage of goods and cash. In case cheating takes place, theft or embezzlement is made and fraud is committed, accounting helps in detection of these losses and also fixes responsibility for it. Proper accounting prevents employees from committing fraud.
- Helpful to management: Accounting is useful to the management in various ways. It enables the management to assess the achievements of its performance. Actual performance can be compared with the desired performance or with the performance of previous years. The weakness of the business can be identified and corrective measures can be applied to remove them. Various profitability, sales and liquidity ratios can be calculated, the actual performance can be evaluated and effective line of action can be decided for the future. Funds flow statement can also be prepared to understand the additional funds earned during the year and their application.
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