Accounting can be compared with heart of human being, as human beings cannot live without heart in the same way a business cannot function without accounting. When heart fails it result in death, in the same way when accounting fails it results in failure or closure of company. Given below are the various advantages of accounting –
- The first and foremost advantage of accounting is that it provides information about the condition of the company in the format which is easy to understand by outsiders like shareholders, government, creditors, customers etc… It is due to accounting that one get easy to understand figures like sales, profits, cost per unit, operational cost, ratios like earning per share, net profit ratio and so on.
- Accounting removes the ambiguity when it comes to valuing a business, if there was no accounting then one had no option but to trust the management in valuation of their business and it would have resulted in overvaluing a business as management will naturally be biased towards their company, but due to accounting management hands are tied as they cannot claim anything and get away with it because you need figures to support you claim and accounting does not give biased figures rather they present the actual position of the company.
- It helps in comparison of the company performance with industry peers and also with itself over the years, it is due to accounting that company can judge whether there is growth in the business of company or slowdown and accounting also helps in locating the areas of weakness due to which company performance has suffered and it helps the company in correcting the mistakes which it did in the past and improve its performance.
- If company finds itself in legal battle against some other company, creditor, customer, employee then it is accounting which comes handy because accounting records are good evidence in legal battle against others who have filed a case against the company with evil intentions.
- Accounting also helps in decision making because accounting by providing various inputs in the form of cash flow arising from taking particular project, cost benefit analysis of project, internal rate of return of project, effect on debt equity ratio etc…, signals whether a particular decision is in interest of the company or it will harm the future prospects of growth of the company.
As one can see from the above that accounting is very important part of business and one cannot overlook it because without accounting it would be very difficult or next to impossible to understand the company’s business and its operations.