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What Are The Advantages And Disadvantages Of Profit And Loss Accounting?

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Robin Burden Profile
Robin Burden answered
There are a number of advantages and disadvantages to keeping an accurate profit and loss account.

Here are a list of pros and cons that I've come up with:

The disadvantages of a profit and loss account
Having managed a small business in a former life (I mean that metaphorically by the way), the main disadvantage that comes to mind when thinking about profit and loss accounting is accuracy.

Data on depreciation and asset value is usually subjective or volatile, and it is difficult to attribute accurate values to these fields. Nevertheless, these factors weigh heavily on a P+L account.

Also, when a manager is constantly using a profit and loss account to make his/her business decisions, choices end up being made on a relatively small sample of data, with only the short-term in mind.

The advantages of a profit and loss account
The pros to keeping an up-to-date profit and loss account are numerous:

  • It's a useful tool for measuring performance and expenditure.
  • An accurate P and L account can tell you where you're losing money, where you're making it, and how to improve performance.
  • It can help you identify trends, forecast and predict future performance, and be better prepared for the rocky terrain that is business management.
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Anonymous answered
The advantage of having a profit and loss account is so that the owner of the business knows what's going in and out of the business at any one time.

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