Traditional Accounting
Traditional financial statements are the financial statements prepared with manual intervention and judgments.
For many decades, that is, before the arrival of computerized accounting and especially enterprise resource plans software, the accounting reports were highly dependent on the traditional financial statements. Basically, such statements were made to have numerous manual interventions in terms of reaching to the desired profit/ surplus level or in the matters of clearing suspense accounts.
Challenges and Drawbacks of Traditional Accounting
The accounts were highly manipulated and the accountants were forced to make changes as per the prejudices of the management. The management were also entitled with an opportunity of recording the personal expenses incurred as the expenses incurred by the business, thereby, claiming deductions from the tax authorities and also were given reimbursement of such expenditure. In fact, the reports maintained from the traditional financial statements are not reliable, true and fair for taking decisions regarding the business development and growth. Even the accountants were able to misappropriate funds from the business, as the accountant was given full access and authorization to pass entries of every department of business.
Transition to Modern Accounting
With the passage of time, the need for more reliable and trustworthy income statements was observed , as a result of which, the accounting software were introduced which are endowed with infinite features. The accounting, was made handy, as the accountant is expected only to pass necessary journal entries for transactions. The accounting software were facilitated to have places for linking the original invoices for the relevant transactions. It provides authenticity for the entries passed and thus, true and fare financial reports were generated, with decreased efforts and lesser time consumption in the preparation of financial statements.
Analytical financial statements are the summary of fact and figures generated by using the advanced accounting software which are mostly used by the top level management to take strategical decisions for the betterment of business or to achieve the organizational objectives.
For the traditional financial statements to be accurate and trust worthy, there was a requirement of three to four level of verifications, whereas, the reports generated using accounting software are in need of comparatively lesser level of verifications as there is no or decreased scope of manual intervention.
Even after having higher level of accuracy and authenticity, there are legal requirements to have information system audit in the entities which meet the criteria prescribed by the statutes. Hence, the analytical financial statements are strictly kept reliable even by the statutes too, which is not present in the case of traditional financial statements.
Merits of Modern Accounting System
The management information system reports created are so helpful in cost control function of the business, as it shows the most appropriate and meaningful facts and figures. Such reports generated is used by the management to focus on the profitability and viability of different lines of products or services offered. Such action will lead to efficient decisions as to where to focus and where not to. For analyzing the profitability, the management looks and analyses on the figures of turnover (either as aggregate for the whole business or the turnover in terms of individual items or products), the cost incurred (towards the production of individual product as well as the total cost of production incurred by the business) the profit margin included in each and for the business as a whole, the quality control area and much more.
Preparation of analytical financial statements involve the requirement of trained professionals who are well equipped with the accounting packages whereas, the preparation of traditional financial statements involve lesser trained accountants who are well versed with the accounting principles. However, the modern industry is looking for the personnel with in-depth knowledge in both the accounting principles and practices as well as the technical knowledge. Every industry seen today is seen as highly competitive and the entities in the industry are not ready to accept the incompetent accountants who are not able to comprehend the system generated reports and make conclusions based on the same.
In every organization, analytical financial statements play vital role in building up the reputation and fame of the business, as it needs to be audited and to be registered with the statutory body so as to be available for public to view and analyze. The well-constructed reports with several additional information will add value to the knowledge of the users of the financial statements to arrive at appropriate conclusion about the ability of business to grow and prosper.
Analytical financial statements also offer for casting facilities like the reports generated on budgeted figures, including the variances which are created as a result of the efficient or inefficient working of the business, as the case may be, whereas, the traditional financial statements do not offer such value added information, as it is totally prepared manually, and requires a lot of time to reach at the budgeted, actual and the variances created. For creating the variance analysis reports, there is a need for engaging experienced personnel to compute the additional information manually.
Limitations of Modern Accounting
However, there are certain limitations for the analytical statement. The information generated through the reports are highly dependent on the inputs inserted. Higher the reliability of inputs, higher the value addition through the reports generated.
Another drawback is that the flexibility to get updated itself is limited and there arises a need for manual intervention in updating the MIS system where we can sense a risk of data manipulation.
The effectiveness of the MIS system and reports generated may be affected by the frequent change in the top management as different managers may have different view of retrieving data and analyzing the same. Thus, frequent changes shall be brought for generating the reports insisted by the new top management.
There are certain advantages for the traditional financials statements. The investment required is lower when compared to the MIS system as it involves huge and advanced technological infrastructure requirement to function effectively.
Hence, a small or medium enterprise may opt for traditional financial statements rather than the analytical financial statements. But most of the small business owners now changing to Analytical financial statements, since it’s easy to analyze business progress and risk.
Lima Tax Consultant is pioneer in implementing modern accounting systems and MIS in different type of MIS. The modern accounting, financial statement and its presentation are the key to business decision. To know more or to get a professional assistance, please contact at info@limagcc.com or visit limagcc.com