BENEFITS OF ACCOUNTING
Accounting refers to the mechanism of maintaining and keeping the records of the transactions and events and also its analysis and interpretation. It also includes the preparation of final accounts i.e. Trading and Profit and Loss Account and Balance Sheet at the end of the financial year. It is associated with communicating the interpreted results of the financial information to its users.
Welsch and Anthony also stressed that:
“A good system of accounting is a storehouse of valuable information.”
The benefits of Accounting are as follows:
REPLACEMENT OF HUMAN MEMORY
Human Memory is limited. It is quite impossible to memorize each and every transaction of business in the mind. To overcome this, the transactions are recorded in the various books of accounts like Journal, Cash Book, Purchase Book, Sales Book, Sales Return Book, Purchase Return Book, Bills Receivable Book, Bills Payable Book Ledger etc.
PROVIDES COMPLETE AND SYSTEMATIC RECORD
Accounting keeps the records of all the transactions in a systematic manner and on the scientific basis as each transaction is recorded as per the rules of the Accounting. To illustrate, the Journal records the transactions in chronological order. Ledger classifies the transaction in different accounts on the basis of which final accounts are prepared.
HELPFUL IN PLANNING
Planning is always about future. A manager in the business has to plan about the upcoming accounting period. He has to set the targets about the cost of production, sales, production quantity, revenue etc. All these things are to be planned in a systematic manner. Accounting data provides the base to set the targets about the future.
HELPFUL IN DECISION MAKING
With the help of accounting, the decision making becomes easy. A business manager has to take various decisions like
- What product is to be produced?
- How much discount should be allowed to customers?
- What project should be undertaken?
- What should be the cost of production?
All these decisions can be taken with the help of accounting data available.
PROVIDE INFORMATION REGARDING PROFIT AND LOSS
Accounting involves the preparation of final accounts i.e. Trading and Profit & Loss Account. The profit and loss account prepared at the end of the year shows the net profit or net loss incurred to the firm. This helps the users to evaluate the performance of the business from the profitability point of view.
PROVIDE INFORMATION ABOUT FINANCIAL POSITION
Financial position of the business shows the solvency, liquidity and profitability position of the firm. The Balance Sheet or Position statement is prepared for this purpose. All the assets are shown on the right hand side of balance sheet and all the liabilities and capital are shown on the left side of the balance sheet. The comparison between the assets and the liabilities reveals the solvency position of the business.
ENABLES COMPARATIVE STUDY
Accounting makes the inter-firm and intra-firm comparison easy. Inter- firm comparison is the comparison of the one firm with another in the same industry. Intra-firm comparison is the comparison of the one department with another department within the same firm.
One can compare the sales, revenue, cost, profits etc. with another firm or with past years. These comparisons provide the useful information to take the important decisions timely.
ASSESSMENT OF TAX LIABILITY
Accounting follows the rules of double entry system. The double entry system of book keeping is recognized by the Income Tax authorities. By keeping the proper records of accounting transactions, it becomes easy to determine the tax liability of the firm.
EVIDENCE IN LEGAL MATTERS
The transactions recorded in the books of accounts are supported by some documentary proof like Cash Memo, Vouchers, Bills, and Receipts etc. So the books of accounts can be presented as proof or evidence in the court of the law and also accepted to substantiate the claim.
HELPFUL IN RAISING LOANS
Accounting information is of great help while raising loans from banks or other financial institutions. Such institutions before sanctioning loans screen various financial statements of the firm such as final accounts, fund flow statement, cash flow statement etc.
PREVENTION AND DETECTION OF ERRORS AND FRAUDS
The maintenance of proper accounting books prevents irregularities, misappropriations, frauds, errors etc. A dishonest employee will hardly get opportunity to commit fraud in respect of cash, goods, etc. if the books are systematically maintained. If at all some errors, frauds etc. have taken place, the possibility of their detection is very high, when proper books are kept.
BUSINESS VALUATION
At the time of sale of business, amalgamation or merger of the firm, the valuation of the business becomes necessary. Accounting records maintained assist the accountants for this purpose.
HELPFUL AT THE TIME OF INSOLVENCY
Insolvency arises when assets of the firm are insufficient to meet its liabilities. At the time of insolvency, one has to give accounting information to the official receiver. Proper accounting record will reveal the liabilities and assets of the business and the Insolvency Accounts can be prepared easily.