What are the advantages and disadvantages of accounting?


Quick Answer

The advantages of accounting include evaluating an entity's financial performance, tracking its progress and reporting the figures to its stakeholders. Disadvantages of accounting include complex rules and sometimes arbitrary or conflicting accounting standards. Regardless of its pros and cons, accounting is a necessary practice, as government institutions require performance figures when calculating taxes and statistics.

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Full Answer

Accounting helps for-profit and not-for-profit organizations maximize the value they create by using historic financial documentation to report and project the health of an organization. However, these reports and projections can often overlook non-monetary contributions to performance, resulting in decisions based on misleading or incomplete information.

The primary purpose of financial accounting is to follow generally accepted accounting principles – or GAAP, to accountants – to prepare financial statements to be used by various external and internal stakeholders. Potential external stakeholders include investors, financial analysts, employee groups, lenders, suppliers and even government agencies like the Federal Trade Commission.

In 2002, the Sarbanes-Oxley Act required the Securities and Exchange Commission to determine the viability of principle-based accounting over rules-based accounting. The proposed shift was in response to the problematic complexity in the GAAP and the increasing likelihood of inaccuracies due to the consistently expanding detail of the rules-based method under which accountants were working.

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