Showing posts with label Accounting. Show all posts
Showing posts with label Accounting. Show all posts

Advantages And Disadvantages Of Centralized Stores

Accounting , Business
Merits Or Advantages Of Centralized Stores

The main advantages of centralized stores can be expressed as follows:

1. Economical

In centralized store, materials are kept only in one warehouse. More goods can be stored in single location that minimizes inventory costs, administrative costs and handling costs. So, it is economical than decentralized stores.

2. Better Control And Supervision

Because of single location and less storage space, it is easier for the storekeeper to inspect, supervise and control inventory properly.

3. Wastage Minimization

Because of proper supervision and tight control misuse and wastage can be minimized. Wastage minimization leads to decrease in the cost of production which helps to increase profitability of the business.

4. Safety

Centralized store ensures safety of goods because of better layout, better supervision and better store audit.

advantages disadvantages centralized stores

5. Fewer Employees

These stores can be managed by fewer specialized employees.

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6. Suitable For Small Firms

Centralized store is suitable for small and medium sized companies with less production units and departments.

Demerits Or Disadvantages Of Centralized Stores

The main drawbacks or disadvantages of centralized stores can be expressed as follows:

1. High Transportation Cost

Materials are supplied to different departments, branches and production units from single store. Therefore, it requires extra transportation and handling costs.

2. Chance Of Delay

Sometimes production centers cannot receive required materials on time because of delay in supply. In this situation production process may be interrupted.

3. Risk Of Loss

In centralized stores, large volume of stock are kept in single location. It increases the risk of loss by flood, earthquake, fire etc. There also exists a risk of obsolescence.

4. Unsuitable

These type of stores are not suitable for big manufacturing companies with several production units, branches and departments.

Pros And Cons Of Centralized Stores In Short

Pros:
- It reduces storing, material handling and supervision costs
- There is better supervision and store audit
- It is suitable for small manufacturing companies
- It minimizes staffing and stationary costs
- It helps to minimize the wastage of materials
- It requires less space for storing goods

Cons:
- It is not suitable for big manufacturers
- There is a possibility of delay in supply of materials
- There is a high risk of obsolescence
- It requires more transportation cost
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Advantages And Disadvantages Of Decentralized Purchasing

Accounting , Business
Merits Or Advantages Of Decentralized Purchasing

The main advantages of decentralized purchasing system can be expressed as follows:

1. Less Investment

In decentralized purchasing system, branches or departments can buy materials according to their needs and requirements. It does not require huge initial investment like in centralized purchasing.

2. Right Quality And Quantity

Materials are purchased to fulfill the current needs of the department or branch. In this procurement system, only required materials are purchased that ensures right quantity and quality.

3. Quick Process

Because of prompt buying decision, quick purchase orders and local suppliers, this process is easier and quicker than centralized procurement.

4. Easy Replacement

Defective materials can be replaced immediately in decentralized procurement system.

5. Better Relation With Local Supplier

Branches purchases their needed materials from local market which helps to establish better relation with local suppliers or sellers.
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6. Smooth Functioning

Materials can be obtained locally at any time without any difficulty. Because of easy and quick procurement process organizational activities can be run smoothly without any delay.

7. Suitable For Large Companies

This purchasing system is suitable for large manufacturing companies with several branches and departments.

Demerits Or Disadvantages Of Decentralized Purchasing

The main drawbacks or disadvantages of decentralized purchasing system can be expressed as follows:

1. High Purchasing Cost

In this purchasing system, company cannot enjoy the benefit of economies of scale. It may lose cash discount and quantity discount because of less quantity purchasing. So, purchase price of materials becomes high.

2. Knowledge Of Buying Staff

Decentralized purchase depends on the knowledge, skills and specialization of buying staff. Lack of appropriate knowledge and skills of staff may lead to over or under purchasing and may lack proper control and supervision of materials or inventory.
advantages disadvantages decentralized purchasing
3. Not Suitable For Small Firms

This procurement system is not suitable for small and medium sized companies with less investment, less production capacity, fewer branches and less operational activities. 

Pros And Cons Of Decentralized Purchasing In Short

Pros:
- It does not require huge initial investment
- Goods can be purchased in right quantity as per the requirement
- It is easy and quick purchasing process
- It is applicable for large companies having several branches and units
- Purchasing decisions can be made quickly

Cons:
- It is not appropriate for small business firms
- Company does not enjoy the benefit of bulk buying
- There exists a possibility of over or under purchasing of goods due to the lack of knowledge of staff.
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Advantages And Disadvantages Of Centralized Purchasing

Accounting , Business
Merits or Advantages Of Centralized Purchasing

The main advantages of centralized purchasing can be expressed as follows:

1. Lower Purchase Price

In centralized purchasing, materials are purchased by central department. So, company can enjoy the benefit of economies of scale, cash discount and quantity discount. Bulk buying also reduces ordering and carrying costs that lowers the purchase price of materials.

2. Better Supervision And Control

It eliminates recklessness, overlapping and duplication in the process of purchasing. It ensures uniform procurement and effective storing of materials. So, centralized purchasing helps to establish better material supervision and control system in the organization.

3. Systematic Recording

All buying functions are performed through purchase department which is properly managed by procurement manager and skilled buying staffs. So, material related records (purchasing, supply, inventory etc.) can be properly and systematically.

4. Better Relationship

It helps to maintain better relationship with suppliers/sellers which increases the bargaining power. It is also helpful at the time of shortage and emergency.

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5. Relief To The Managers

All the materials are purchased and supplied by a purchase department. Managers of other branches, departments and units do not have purchasing responsibility. So, they can focus on their main duties and responsibilities.

Demerits Or Disadvantages Of Centralized Purchasing

The main disadvantages of centralized purchasing can be expressed as follows:

1. Requirement Of High Investment

The main drawback of centralized purchasing is that it requires huge amount of initial investment to purchase materials for all branches and departments. 

2. Complexity

It is very difficult to purchase and supply materials to different branches and departments according to their needs and requirements. Buying staff cannot handle purchasing activity properly if the organization is very large with  several branches located at different geographical regions. So, this procurement is more complex than decentralized purchasing.

3. Chance Of Delay

In this system, procurement process is longer than decentralized purchasing. So, it is difficult for the branches to receive materials in time.
advantages disadvantages centralized purchasing
4. Not Suitable For Large Companies

It is not suitable for large companies with many branches located far from the headquarter.

5. Emergency Situation

Branches and departments are not allowed to purchase materials from local market. So, organizational activities can be delayed at the time of emergency because of the shortage of materials.

Pros And Cons Of Centralized Purchasing In Short

Pros:
- It minimizes purchasing price because of large scale buying and less carrying costs
- It ensures supervision and better material control system
- It eliminates recklessness and duplication in purchasing
- Inventory records can be maintained properly and systematically
- It maintains better relationship with seller

Cons:
- It requires high initial investment
- It is not suitable for large firms having several departments and branches because there is a chance of delay in receiving materials
- It will be difficult to replace defective materials
- This procurement system is not suitable at the time of emergency
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Limitations Of Accounting

Accounting , Finance
The main drawbacks or limitations of accounting can be highlighted as follows:

1. Ignores Non-monetary Items

Accounting records only monetary items (that can be measured in terms of money) and ignores non-monetary items (cannot be measured in terms of money) such as employee morale, loyalty, management efficiency etc. that play important role in success or failure of business.

2. Past Data

Generally, accounting uses past or historical financial data and information. It ignores some key factors like price level change and inflation. So, it may fail to show actual financial strength or weakness of the firm.
disadvantages of accounting
3. Frauds And Manipulation

Several accounting treatments are based on personal judgment and estimates. So, there exists a chance of manipulation of data and commitment of frauds.

4. Several Alternatives

There are different methods of stock valuation, depreciation, capital budgeting decision, amortization of assets etc.. Several alternatives may create complexity and confusion.

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5. Lack Of Secrecy

It is very difficult to maintain secrecy of accounting data and information because of several users.

6. Difficulty In International Trade

Different accounting standards and methods may create difficulty in international trade.
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Advantages And Disadvantages Of Variable Costing

Accounting , Business
Benefits / Merits Or Advantages Of Variable Costing

The main advantages of variable costing can be highlighted as follows:

1. Simplicity

Variable costing system is simple and easy method of cost accumulation than absorption costing approach.

2. Assists CPV Analysis

It provides essential data and information for cost volume profit (CPV) analysis.

3. Cost Separation

It clearly separates manufacturing costs into fixed costs and variable costs which simplifies production activities.

4. Relation With Standard Costing And Budgetary Control

Cost controlling techniques such as budgetary control and standard costing are related with variable costing.

5. Easy Profit Determination

It is very easy to determine profit under variable costing. Profit is determined on the basis of sales and it is not affected by inventory changes.

6. Planning And Controlling

Variable costing helps the management in cost control and profit planning.

Drawbacks / Limitations Or Disadvantages Of Variable Costing

The main disadvantages of variable costing system can be highlighted as follows:

1. Ignores Accounting Principles

This method of cost accumulation ignores generally accepted accounting principles (GAAP).

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2. Difficult To Separate Costs

It is very difficult to separate manufacturing overhead into variable costs and fixed costs.

advantages disadvantages variable costing

3. Understate Of Cost

This method understates the product cost by excluding fixed costs. So, fair cost of production cannot be determined.

4. Unsuitable

Variable costing is useful for internal reporting only and not suitable for external reporting.

Pros And Cons Of Variable Costing In Short

Pros:
- It is useful for cost volume profit analysis because it provides data about fixed cost, contribution margin etc.
- It is very helpful for management to make pricing decisions
- Profit can be determined easily in this method
- It simplifies production activities
- It provides cost data and information which is helpful for management control

Cons:
- It does not follow generally accepted accounting principles (GAAP)
- It is not suitable for making long-term pricing policy
- It becomes to separate manufacturing costs into fixed and variable costs
- Accurate cost of production cannot be determined because it excludes fixed costs
- It is not useful for external users such as investors, shareholders, public etc. because it is prepared for internal use only.
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Disadvantages Of Cash Flow Statement

Accounting , Finance
The major limitations or disadvantages of cash flow statement can be described as follows:

1. Limited Scope

Cash flow statement has limited scope because it cannot reveal net income from operation. 

2. No Complete Information

Cash flow statement cannot show the complete and up-to-date financial position of the firm.

3. Chance Of Inaccuracy

It may provide wrong information if there is wrong data in the balance sheet.

4. Ignores Accounting Concept

Cash flow statement ignores accrual concept of accounting.

True net income cannot be obtained because cash flow statement ignores non-cash items.

6. Historical Data

It uses historical financial data from balance sheet and income statement. So, it may not be suitable for future forecasting and financial planning.
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Advantages Of Cash Flow Statement

Accounting , Finance
The main benefits or advantages of cash flow statement can be studied as follows:

1. Cash Inflow And Outflow

Cash flow statement reports about cash inflow and cash outflow and discloses the change in cash balances between two balance sheets.

2. Cash Forecast

Cash flow statement helps to identify future cash need by revealing current cash position. It helps the management to forecast future cash flow.
advantages cash flow statement
3. Liquidity And Profitability

It presents current cash position which helps to ascertain solvency, profitability and liquidity position of the business.

4. Financing Decision

Management can make different financing and investment decisions with the help of cash flow statement.

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5. Financial Planning

It helps the management to formulate financial plans.

6. Capital Budgeting Decisions

Capital budgeting decisions are taken on the basis of projected cash flows.

7. Prevents Mismanagement Of Cash

Cash flow statement prevents mismanagement of cash in the business firm.
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Disadvantages Of Funds Flow Statement

Accounting , Finance
Some of the notable limitations or disadvantages of funds flow statement can be highlighted as follows:

1. Historical

Funds flow statement is historical in nature because past financial information are used to prepare it. Financial statements and balance sheets of previous period are the bases of funds flow statement. So, it cannot present accurate current position of the business.

2. Not Original

It is only the rearrangement of financial data of balance sheet, financial statement and the income statement. So, funds flow statement is not original as it cannot be prepared alone.

3. No Cash Position

Funds flow statement does not disclose the cash position of the firm, for which cash flow statement should be prepared separately. 
disadvantages funds flow statement
4. No Future Indication

It discloses past financial situation of the firm which may not be suitable for future purpose.

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5. No Non-fund Transactions

It ignores non-fund transactions such as purchase of assets or properties by issuing shares. It records only those transactions which directly affect working capital.

6. Not Suitable

Funds flow statement is not suitable for financial analysis.
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Advantages Of Funds Flow Statement

Accounting , Finance
The main benefits or advantages of funds flow statement can be highlighted as follows:

1. Source And Use Of Funds

Funds flow statement discloses the source of funds received by the firm and the areas where those funds are used.

2. Changes In Financial Position

It discloses the changes in financial position (increase or decrease in working capital) and explains the reasons for changes.

3. Allocation Of Resources

Funds flow statement helps in proper allocation of resources by providing key financial information and data to the management.
advantages funds flow statement
4. Evaluation Of Financial Position

It provides information regarding financial structure, fund generating capacity, position of assets and liabilities of the firm, working capital condition etc. which helps to know the actual financial position of the firm.

5. Future Guidance

Funds flow statement provides past financial data and information to the management. It helps the top level management to make future financial policies and plans.

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6. Use Of Working Capital

Funds flow statement checks the proper use of working capital and gives suggestions to improve.

7. Image And Goodwill

It ensures proper allocation of resources and proper use of working capital which increase the productivity and profitability of the firm. So, it helps to maintain good image and goodwill among shareholders.
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Advantages Of Flexible Budget

Accounting , Business
Some of the notable benefits or advantages of flexible budget can be pointed out as follows:

1. Range Of Activity

Generally, static budget is prepared for single level only, but flexible budget is prepared for a range of activity. This is one of the major advantages of flexible budget.

2. Easy Comparison

Flexible budget helps to compare actual output, cost or performance with standard or budgeted output, cost and performance.

3. Cost Control

It can be used as a effective tool for cost control because flexible budget reacts to adverse situation.

Static budget is based upon assumptions, judgment, estimates and approximations. But flexible budget is prepared on the basis of knowledge and principles.

5. Flexibility

It is more flexible than static budget. It can be modified or changed according to the market situation and environment.

6. Performance Measurement

Flexible budget helps to measure managerial and operational performance.
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Disadvantages Of Budgeting

Accounting , Finance
Major limitations or disadvantages of budgeting can be pointed out as follows:

1. Based On Estimation

Budget is prepared on the basis of approximation, estimates, assumptions and judgment. So, it may lack accuracy and reliability.

2. Cost And Time Consuming

It takes more time, effort and cost to prepare budget for large sized organizations.

3. Less Flexibility

It is less flexible in nature and cannot be changed easily according to the market situation and environment.

Budgeting may demotivate employees due to the lack of participation. It may create behavioral problems. 

5. Conflict

There is a high chance of conflict because of lack of coordination among employees and coordination between, units, departments and branches.
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Advantages Of Budgeting

Accounting , Finance
The main benefits or advantages of budgeting can be pointed out as follows:

1. Goal Achievement

Budgeting provides guidelines to achieve operational and financial goals of the organization.

2. Better Coordination

It helps to maintain better coordination by linking organizational objectives and available resources in order to achieve the goal.

3. Guidelines

Budgeting provides guidelines or road map for better performance.

4. Better Decision Making

Budgeting helps the management to take wise decisions by providing proper guidelines and direction.

5. Resource Utilization

It promotes proper utilization of resources (material, labor and capital) to increase productivity and profitability.

6. Motivation

It motivates the management and employees which leads to better performance and job satisfaction.

7. Performance Evaluation

It helps to evaluate the performance of different units, departments and employees in the organization.

It helps to maintain better communication between the management and the subordinates.

9. Increase Efficiency

Because of motivation, coordination and better decision making, it helps to increase efficiency of the organizational activities. 

10. Corrective Action

It regularly monitors the progress of organizational activities and provide tool for corrective action when needed.
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Advantages Of Value Engineering

Accounting , Business
The main benefits or advantages of value engineering can be highlighted as follows:

1. Cost Reduction

Value engineering helps to reduce the cost of production without reducing the quality of the product.

2. Improved Quality

It helps to improve product quality and design to attract more customers.

3. Customers' Satisfaction

It helps to increase customers' satisfaction by fulfilling their expectations and needs without increasing the cost.

4. Simplify The Process

Value engineering simplifies the production process by eliminating unnecessary functions.

5. Higher Profit

Business firm can make more profit because of lower production cost and higher sales volume.

6. Resource Utilization

It promotes proper utilization of resources to enhance production process.
advantages of value engineering

7. Modernizing

Value engineering focuses on modern, cheaper and efficient techniques and approaches to improve the productivity.

8. Standardization

It gives emphasize on the standardization of firms' products and services.
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Advantages And Disadvantages Of Sinking Fund

Accounting , Business
Merits Or Advantages Of Sinking Fund

The main advantages of maintaining sinking fund can be pointed out as follows:

1. Replacement Of Asset

Sinking fund helps the company to replace its fixed assets by providing adequate fund.

2. Redemption Of Bond

It provides fund to redeem preference share, bond and other forms of long-term loans.

3. Improve Goodwill And Faith

It helps to maintain goodwill and faith of the company and also helps to maintain future credibility.

4. Encourage Investment

It encourages the investors to invest in the firm because of its goodwill, faith and credibility.
advantages-disadvantages-sinking-fund

5. Financial Stability

Sinking fund promotes financial stability of the business firm.

Demerits Or Disadvantages Of Sinking Fund

Some of the major drawbacks or disadvantages of sinking fund can be pointed out as follows:

1. Reduction In Profit

It reduces the profit to be distributed as dividend.

2. Complexity

It is very complex to maintain sinking fund accounts.

3. Difficulty

Although sinking fund provides fund for the replacement of old assets, it is very difficult to estimate the required amount for new assets/
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Advantages And Disadvantages Of Receipt And Payment Account

Accounting , Business
Merits Or Advantages Of Receipt And Payment Account

The main advantages  of preparing receipt and payment account can be pointed out as follows:

1. Proper Recording Of Cash Transactions

Receipt and payment account records all the cash and check receipts and payments occurred during the period properly.

2. Provides Summary

It provides a summary of all cash receipts and cash payments incurred during a period at a glance. 
advantages disadvantages receipt and payment account
3. Verification Of Cash Book

It helps to verify the cash book of the business firm. So, it ensures the accuracy of company's cash book.

Demerits Or Disadvantages Of Receipt And Payment Account

Major drawbacks or disadvantages of receipt and payment account can be highlighted as folows:

1. No Disclosure Of Profitability

Receipt and payment account cannot disclose accurate profitability of the firm.

2. No Accrual Basis

It does not show cash receipts and payments on accrual basis. 

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3. No Non-cash Transactions

Receipt and payment account fails to show non-cash transactions of the firm.

4. No Surplus Or Deficiency

It records cash and check transactions of the firm but does not disclose the surplus or deficiency of the business during the period.
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Advantage And Disadvantages Of Secret Reserve

Accounting , Business
Benefits Or Advantages Of Secret Reserve

The main advantages of creating secret reserve can be pointed out as follows:

1. Covers Future Loss And Contingencies

Creation of secret reserve helps the organization to cover future contingencies, liabilities and unknown losses.

2. Provides Financial Stability

Secret reserve helps to maintain good financial health of business because it provides financial stability by covering unexpected losses and liabilities. 

3. Internal Financing

It may be used as the source of internal financing to retain assets and other properties.

4. Additional Working Capital

Secret reserve helps to improve operational efficiency of the firm by eliminating the inadequacy of working capital by providing additional funds.

5. Image And Goodwill

It helps to maintain image and goodwill of the business and wins the public confidence. 
advantages disadvantages secret reserve
6. Equalization Of Dividend

It helps to equalize the rate of dividend which gives positive message to the shareholders.

Drawbacks Or Disadvantages Of Secret Reserve

Some of the major disadvantages of secret reserve can be pointed out as follows:

1. False And Inaccuracy

It ignores accounting norms and standard by providing false and inaccurate financial data.

2. Misuse Of Fund

There is a high chance of fraud and misuse of secret reserve by the top level management.

3. Less Profit

Creation of secret reserve decreases the amount of actual profit of the firm. So, shareholders may be disappointed.

4. Borrowing Problem

Secret profit lowers the net profit of the firm. Due to poor profit condition, banks and other financial institutions hesitate to provide loan.

5. Decrease In Share Value

Share value decreases because of  secret reserve which is not good for the shareholders and business.
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Advantages Of Petty Cash Book

Accounting , Business
The main benefits or advantages of  petty cash book can be pointed out as follows:

1. Relief To Cashier

Petty cash book relieves the main cashier because it is prepared by the petty cashier. Main cashier can focus on other major financial transactions of the business.

2. Systematic Recording

It records all the minor expenses of the business properly and systematically and provides information quickly when needed.

3. Assists Controlling

It helps to control tiny expenses of the organization by making comparison between the petty expenses of two periods.
advantages petty cash book
4. Time And Labor Saving

Petty cash book saves the valuable time of main cashier because it is maintained by the petty cashier. Because of scientific recording, it is labor saving also.

5. Minimization Of Errors

Petty cash book helps to minimize errors and frauds because it is checked regularly and reported timely.

6. Preparation Of Main Cash Book

It facilitates preparation of main cash book quickly and easily by minimizing the number of small cash transactions.

7. Division Of Labor

Petty cash book promotes division of labor in the business organization
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Advantages And Disadvantages Of Double Entry System

Accounting , Finance
Advantages/Merits/Benefits Of Double Entry System

Major advantages of double entry bookkeeping system can be highlighted as follows:

1. Systematic And Scientific Method

Double entry book-keeping is scientific and systematic system of recording the financial transactions of the business. It is guided by specific rules, principles and techniques.

2. Complete System Of Accounting

Double entry system records both aspects (debit and credit) of each transaction. So, it is a complete system of book keeping.

3. Suitable For Large Companies

It is suitable for large business companies with large volume of financial transactions and resources.

4. Ensure Arithmetical Accuracy

Trial balance is prepared under double entry system. Therefore, it ensures arithmetical accuracy of accounting records.

5. To Obtained Profit Or Loss

Profit or loss of a company can be obtained by preparing profit and loss account at the end of the accounting period.

6. To Know The Financial Position

Balance sheet is prepared at the end of the year. It helps to know the actual financial position of the business.

7. Helps Decision Making

Double entry system provides provides financial data, profit, loss and financial position of the business firm. So it helps the management to take appropriate decision for the betterment of business.

8. Comparison Of Results

Financial results of current year can be compared with the result of previous year which helps the management for future planning.
advantage disadvantage double entry system
Disadvantages/Limitations/Demerits Of Double Entry System

The main drawbacks or disadvantages of double entry book-keeping system can be pointed out as follows:

1. Complex System

Double entry book-keeping is complex system of recording the financial transaction of business. It requires complete accounting knowledge to maintain the books of accounts. It is not easy to understand this method of accounting.

     Also Read:

2. Time And Cost Consuming

It requires more time to record financial transactions in the books of accounts. It requires more money to install and maintain double entry book-keeping in the organization. So, it consumes more time, money and effort as compared to single entry system.

3. Unsuitable For Small Firms

Double entry system is nor suitable for small business organizations having less number of financial transactions and resources.
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