If you’ve worked for a company or know how things function in a company, then you need to be aware of the functions of income statements as well as cash flow statements balance sheets and more. Right? This is exactly the things that fall within Financial Accounting, where the company or the organization does not just record transactions in order to create these essential documents or reports, but also examines them, summarises them, and present them in financial statements. This is the whole procedure we refer to as financial accounting. However, it could pop up in your mind: What function does it serve? is it useful or what’s the negatives of it? Correct? That’s the main reason that we’re in this post today, where we’ll go over all possible benefits and drawbacks of financial accounting. Let’s go today.
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Advantages of Financial Accounting
1. Keeping Things Organized
Financial accounting allows for the recording of every business transaction in a timely and accurate manner. The detailed records of any company help to keep an organized collection of financial information to ensure the smooth running of company. With the help of such records, it is easy to keep track of his financial activities as a company and ensure that every transaction is documented and later analyzed very easily. This technique allows anyone to quickly discover financial data that are crucial in audits, filling in tax forms, or planning for the future.
2. Catching and Preventing Fraud
One of the main benefits of accounting for financials is that it assists in detecting and avoid fraud. Complete and precise records of everything related to money do not leave anything to the possibility of interpretation or speculation, do you are aware? This method of recording transactions helps to prevent fraud because managers and employees are aware that transactions are watched with great attention.
3. Checking How Well You’re Doing
Simply put, simply, financial accounting reveals how profitable the company is, how effectively the company is able to manage its debts, and how healthy its overall situation is by using the balance sheet, income statement, and a statement on cash flow. These all play a role for providing management with the possibility of making informed choices about where to invest money or where to save and what decisions to take that should be contemplated in the near future. Monitoring these financial indicators will help them identify areas that they should improve and implement to keep their financial position solid.
4. Creating Essential Financial Documents
Accounting for financials is crucial in the creation of important financial documents, such as accounts of income and balances or cash flow statement. Why is that? They are essential in presenting lenders, investors and authorities the financial situation of a business. With accurate financial statements these individuals are able to be able to make informed decisions about the transactions they make with the company.
5. Getting Loans Made Easier
This is especially true with regard to companies who seek out funds outside of their company, such as credit lines or loans. In fact, banks and other institutions who issue loans can use the information contained in financial statements to determine the company if it is qualified for loans and how financially sound it is. A thorough and accurate financial statements also demonstrates an organization’s capacity to manage the burden of debt and to continue making more money, which increases the ease at which a business can access loans.
6. Evidence for Legal Matters
Financial records that are accurate are the primary evidence in legal proceedings that is quite understandable. A properly prepared financial record aids in presenting a clear, legally admissible records of the financial activities of a company when there is a dispute between the parties involved or when the regulations aren’t satisfied, they can prove useful when defending a court case. The evidence provided by such records will safeguard the company from legal proceedings and assist in settling disputes efficiently.
7. Helping Management Make Decisions
Financial accounting provides all the important information that can be used to make important decisions for the company. With the accessibility of accounting statements is possible for managers to spot patterns and evaluate performance against the norms to make informed decisions when it comes to the utilization of budgeting, resources, as well as long-term plan. This is the most effective way to go isn’t it?
Disadvantages of Financial Accounting
1. Ignores Non-Financial Aspects
Accounting for financials is not restricted to numbers that can be measured however, in certain instances it can be a detriment to other important aspects like market competition and economic conditions, technological and political developments. In the absence of these other factors could provide a limited view of what’s happening in the business, making decisions that ignore important aspects that affect the business.
2. Potential for Manipulation
Financial accounting, which is believed to be very rigid in nature, can be altered to some degree. Accountants or managers may alter numbers in their favor to appear more impressive than it really is. This can expose the business to a myriad of legal problems, all fast.
3. Lacks Detailed Insights
While financial accounting provides an overall picture of the financial health of a company In most instances the precise information needed to make specific decisions might be lacking. Therefore, a deep understanding of the performance of specific departments, products or services could be hidden.
4. Based on Just Estimates
A large portion of financial accounting is based on estimates, such as estimates of depreciation, and expected losses from accounts that have not been paid. This can lead to a lot of inaccuracy because these estimates are based on guesses and may not be 100% accurate every time. In the end, they’re only estimations, right?
5. Still stuck in the past with the Value of Assets
Financial accounting typically reports the value of asset at the initial price, but does not adjust them for changes in market prices over time. This may provide the impression of incorrect value of company assets which can make financial reports false since they don’t represent the true value of assets owned by the company. This can also degrade the real situation of the financial health of a company in times that have high inflation, or major market fluctuations, with assets listed as being worth greater or lesser than they actually are.
Conclusion
Overall Financial accounting is among the most significant and important tools or instruments in an organization. It allows you to understand the financial health of the business. Now you know the reason why it is important for a majority of firms to employ financial accounting, aren’t they?
