Limitations of accounting
Limitations of Accounting
Accounting is helpful to business in determining the position of assets and liabilities as well as profit and loss. It
enables the business to take important future decisions. But one can not say that the accounting informations are cent percent accurate and true. Following are the main limitations of accounting
1. Incomplete Information- Accounting system of any business records only those transactions which are financial in nature. It records only the quantitative aspect of our transactions. Transactions of non-financial nature do not find place in accounting. Certain very important information such as competency of the management, change in the economic and political situations, Government policies,
competition in the market and change in consumers preferences etc. are not recorded in accounting though they affect the financial soundness of the business.
2. Inexactness- Accounting assesses profit or loss of the business on the basis of both the real and assumed estimates. Accountants make the valuation of stock, determine the method of depreciation and maintain various reserves and provisions in any way, they like. Different firms have their own different methods. So the results of the business will change with the change in the practice.
3. Showing valueless assets- There are certain assets which do not have real value, but they are shown in our Balance Sheet. These assets are goodwill, patents, preliminary expenses, discount on issue of snares etc. Showing these assets in the books of accounts make its results doubtful.
4. Manipulation- Accounting results are based upon the information supplied to it. The management may be biased and feed manipulative information to prove its point of view. Accountants can show the result of business, as desired by the owners of the business. This may be done by omitting certain accounts, increasing or decreasing the amounts of certain accounts, under-estimating or over-estimating the value of assets. For example, if purchase of furniture is shown as purchase of goods, the profit will reduce,
