Advantages and Limitations of Accounting

Advantages

• Provides a permanent, reliable record instead of relying on memory.
• Enables ascertainment of profit/loss and financial position at any point in time.
• Provides information to compare one year with another, or one firm with another.
• Helps in decision-making — pricing, expansion, borrowing.
• Acts as legal evidence in disputes, since properly maintained books are admissible in courts and are relied on by tax authorities.
• Helps in valuation of business, e.g. at the time of sale or admission of a new partner.

Limitations

• Records only monetary transactions — it ignores non-monetary but genuinely important facts such as the efficiency of management, employee morale, or a competitor's new product.
• Based on historical cost — assets are usually recorded at their original cost, not their current market value, so the Balance Sheet does not show "what the business is worth today."
• Permits alternative treatments — different but equally acceptable methods (e.g. Straight Line vs Written Down Value depreciation, FIFO vs Weighted Average for stock) can give different profit figures for the same facts, reducing comparability. …