The Advantages & Disadvantages of Financial Accounting

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Financial accounting is a necessary part of doing business, but its costs and administrative overhead can be problematic for small operators.

Imagine you didn't record all your financial transactions in one place. How would you find all the information you needed to make strategic decisions that would help your business grow? Financial accounting is the science of recording all your transactions in a systematic manner so nothing slips through the cracks. You'll be able to compare the profits from one year with the profits from other years to see how the business is improving. Financial accounting also can pose challenges, however, and you won't get realistic information if the process goes wrong.

Advantage: Instant Access to Information

Among the most significant advantages of financial accounting is the information is reveals about a business. This information is useful to not only leaders who use data about revenue, expenses, assets and equity to make decisions for the future, but also to investors who examine the results of financial accounting, known as financial statements, to decide which businesses to invest in. Financial accounting allows business leaders to alter their budgets and plans for the future to address new financial problems or take advantage of the financial strengths that accounting reveals to grow or gain competitive advantages within an industry.

Advantage: Aids Compliance

Government regulations require businesses to perform financial accounting, which means that the process has the added advantage of keeping a business in line with regulatory agencies and free from fines or disciplinary action. Financial accounting information is an element of transparency and business ethics, requiring honest and accurate information for investors, competitors and market analysts to review. Businesses also need information from financial accounting, such as profits after expenses and the value of tax-deductible spending, to complete their annual business income tax returns.

Disadvantage: Accounting Is a Cost

Financial accounting is an expensive part of doing business, especially for large businesses. For a small business, owners need to devote time to accounting, which takes away from the time they can spend working with employees or devoting their talents to the business' products and services directly. Large businesses employ accounting departments that consist of college-educated specialists who earn professional salaries and require benefits, offices and equipment to perform their jobs. This means that a business needs to use the information it gains from financial accounting to its own financial benefit or risk losing money in the process.

Disadvantage: Timing Problems

Financial accounting also can pose disadvantages to a business by disrupting the timing of its operations. This is particularly true when a businesses chooses the wrong type of accounting for its activities, or fails to update its accounting methods to keep pace with its growth. For example, cash method accounting only enters transactions once they're completed, which works well for small businesses but can't account for the outstanding payments and accounts receivable that a large business is likely to have. A large businesses that uses cash method accounting instead of accrual method accounting risks losing track of major components of its financial picture, while a small business that employs the accrual method takes on unnecessary complication and expense.

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