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Unit 1: Introduction to Accounting

(f) Consumer: Consumer is interested in information on the continued existence of the Notes
business and thus probability of the continued supply of the products, parts and
after sale services. They ensure continuous existence of a business, especially in case
of durable products which require after sales service and spare parts.

1.1.6 Importance and Advantages of Accounting

Appropriate and adequate accounting system plays a vital role for the successful operation of
the business. It also helps in the determination of cost of production, controlling internal as well
as external activities of the business, forecasting of profit, cost and sales, etc. Accounting is also
useful in locating the errors, distribution of dividend and bonus to shareholders. Thus, accounting
is being used as a means to achieve the objective of the business. The other advantages of the
accounting are as follows:
1. Replacement of human memory: As the human’s memory is limited and short, it is difficult
to remember all the transactions of the business. Therefore, all the financial transactions
of the business are recorded in the books. By this way the businessmen cannot only see the
records at the required time but can also remember them for a long time. Thus, recording
of the transactions is the replacement of human’s memory.
2. Helpful in the determination of financial results and presentation of financial position:
Accounting is very useful in the determination of the profit and loss of a business and
showing the financial position of the business.
3. Helpful in assessing the tax liability: Generally, a businessman has to pay corporate tax,
VAT and excise duty, etc. Therefore, it is necessary that proper accounts should be
maintained to compute the tax liability of the business.
4. Helpful in the case of insolvency: Sometimes the businessman becomes the insolvent. If he
has properly maintained the accounts, he will not face the problems in explaining few
things in the court.

5. Helpful in the valuation of business: If the business is shut down and sold, accounting
helps the businessman to determine the value of business. It would be possible only in
that case when the accounts of the business are properly maintained.

6. Helpful in the valuation of goodwill and shares: If accounts of the business are properly
maintained, it would be quite convenient to determine the value of goodwill. Goodwill is
very important for the determination of the value of shares of the company.
7. Accounting makes comparative statement possible: Proper and adequate accounting helps
in comparing the income, expenditure, purchase, sale of the current year with that of the
previous years. And then future plans, policies and forecasting may be possible.
8. Raising of funds become easy: It helps in raising funds from investors or financial
institutions by promising investors a fixed claim (interest payments) on the cash flows
generated by the assets, with a limited or no role in the day-to-day running of the business.

1.1.7 Limitation of Accounting

In spite of being so many uses and advantages of accounting, it has a number of limitations
which are as follows:
1. Recording of monetary items only: In accounting only those transactions, which have the
monetary value, are recorded. And those transactions which do not have the financial
value whether those are important in business, are not recorded in the accounting. For
example, efficiency of the management, honesty of the workers, etc.

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