Corporate Accounting, Advantages and Disadvantages

Accounting, also known as bookkeeping, is the activity that involves the collection, analysis, classification, analysis, interpretation and presentation of company financial information. This branch of accounting plays a vital role for businesses and companies. Corporate accounting is one of the most fundamental ways to determine the financial situation of any corporate entity. It aids businesses and companies to take financial decisions which helps in the mitigation of financial risks as well.

UGC NET Commerce Notes 

What is a Corporate Entity?

A corporate entity is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. It is a never-ending entity having existence in the eyes of laws.

What is Corporate Accounting?

Corporate accounting is the process of recording, classifying, summarising and interpretation of business transactions. Every corporate entity performs accounting functions to determine its financial situation. The whole concept of performing accounting functions by a corporate entity is called corporate accounting. This is also known as business accounting or company accounting.

Corporate accounting is the analysis of cash statements, balance sheets, financial statements, etc. as well as the analysis of various processes such as planning. It is also a functional tool for business analysis such as integration, integration and data collection.

Each relevant organisation performs accounting functions to determine its financial situation. The accounting practices performed by these organisations are called corporate accounting practices. Corporate accounting is considered a specialised branch of accounting that deals with financial transactions. Business operations often include financial planning and cash flow statements. It also deals with the analysis and interpretation of the company’s financial statements.

Importance of Corporate Accounting

Corporate accounting is one of the most important functions of any organisation. Companies do accounting to analyse their financial situation and predict future business decisions. This position is important for:

• Communicating the status of the company’s assets and liabilities to stakeholders
• Ensuring that financial transactions comply with the rules and regulations of the government
• Preparing reports for management to make decisions about the company.
• Complying with organisational rules and policies

Some terms related to corporate accounting

• Equity Shares: Equity shares serve as long-term financing options for companies. These shares are issued publicly and are non-redeemable. Shareholders of equity shares possess voting rights, entitlement to profit sharing, and the ability to claim the company’s assets.
• Sweat Equity Shares: Organisations often reward employees or directors for outstanding performance by granting sweat equity shares. The term “sweat equity” pertains to an individual’s non-monetary contributions to an organisation.
• Subscribed Capital: Subscribed capital refers to a portion of the issued capital that the public has committed to purchasing. It doesn’t necessarily mean that all issued shares will be taken up by the public.
• Paid-Up Capital: Paid-up capital is the actual amount contributed by shareholders.
• Reserve Capital: According to Section 99 of the Companies Act, 1956, reserve capital is uncalled capital that can only be utilised during company winding-up.
• Preference Shares: Under Section 42 of the Companies Act, 2013, preference shares encompass the share capital portion granting holders priority in dividend payment and share capital repayment during company liquidation.
• Debenture Redemption Reserve: Also referred to as a sinking fund, this reserve accumulates at least 25% of debenture face value annually until maturity. It safeguards debenture holders’ interests.
• Conversion into Shares: Designed for convertible debentures, this approach allows holders to convert units into the company’s ordinary equity shares. Conversion discharges the total debenture liability.
• Open Market Purchase: Companies can acquire debentures from the open market if the units are traded on a regulated exchange, simplifying administrative procedures.

Advantages of Corporate Accounting

There are numerous advantages from which businesses/companies can benefit, as follows:

Creates/Monitors Budget

Corporate accounting aids in the creation and monitoring of budgets, enabling effective resource allocation and financial planning.

Tracks Business Expenses

Corporate accounting systematically tracks and analyses business expenses, ensuring cost control and efficiency.

Monitors Financial Position of the Company

Corporate accounting provides real-time insights into a company’s financial health, fostering informed decision-making.

Facilitates Audit

Properly maintained records simplify audits, saving time and enhancing transparency. Audited financial statements bolster trust among investors, stakeholders, and regulators.

In Compliance of Law

Corporate accounting helps companies stick to legal and regulatory requirements, reducing legal risks.

Assists in Business Decisions

Corporate accounting provides accuracy in financial data and helps in business decisions by providing a clear overview of the company’s financial standing.

Effective Management

Corporate accounting supports management with crucial financial insights for strategic planning and growth which enhances overall efficiency of management.

Disadvantages of Corporate Accounting

Corporate accounting suffers from some drawbacks which are as follows:

Considers Only Monetary Terms

Corporate accounting mainly focuses on finances and neglects various non-monetary aspects like employee satisfaction and environmental impact, leading to incomplete decision-making.

Accounting Data May Be Biased

Corporate accounting can be  biased in financial reporting which can skew data accuracy due to personal interests or corporate pressures, leading to misrepresented financial information.

Manipulation of Accounts

Creative accounting practices, like inflating revenues or hiding liabilities, can mislead stakeholders and regulators, undermining trust in financial statements.

Restraint of Accounting Policies

Corporate accounting strictly follows laws. Rigid adherence to standard policies may not fit every business scenario, limiting accurate representation of a company’s unique financial situation.

Ignores Time Value of Money

Corporate accounting neglects the time value of money which can result in underestimating the long-term investment impact and future benefits of projects.

Redundant Paperwork

Corporate accounting includes excessive paperwork which can lead to errors, consumes resources, and detracts from more strategic activities.

Excessive Tax Filings

Corporate accounting involves complex accounting regulations necessitating numerous tax filings, burdening businesses with extra time and resource expenses.

Conclusion

Corporate accounting is the most important part of any organisation. Companies use corporate accounting to analyse their financial situation and predict future business decisions. It helps companies to ensure that financial transactions comply with the rules and regulations of the government. It aids in the preparation of reports for management to make decisions about the company.

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