8 limitations of accounting

8 Limitations of Accounting accountingrevenue.com/8-limitations-of-accounting.html Sanjoy19

July 19, 2020

There are many functions and advantages of accounting, you all know, but there some limitations of accounting. Today I will say the limitations of accounting. Such as limitations of accounting I. Accounting is not Fully Exact. ii.Unrealistic Information.

Learning Objectives : Limitations of Accounting After studying this unit,you will be able to:

overview of Limitations of Accounting: (i) It can express financial results in monetary terms only but has no tool to gauge other important aspects like human resource utilization, management efficiency, quality control, etc. (ii) It makes a dogmatic approach to explain financial situations with some rigid ideas and concepts. In the changing scenario of socio-economic aspects, the results exhibited by accounting fails to reach the optimum level. (iii) Accounting depends mostly on historical costs; conventional accounting fails to measure the impacts of inflation. (iv) Comparison of accounting results does not become effective as the basic principles applied over years are static in nature. This especially affects the valuation zones, like inventory valuation, etc.

Limitations of Accounting : i. Accounting is not Fully Exact. ii.Accounting does not Indicate the Reliable Value. iii. Accounting ignores the Qualitative Elements. iv. Accounting Ignores Effect of Price Level Changes. v. Accounting may lead to Window Dressing. vi.Unrealistic Information. vii. Recommendation of alternative methods. viii. Accounting never shows the market value of assets or business: 1/4

Limitations of accounting can be depicted in the following chart as:

Limitation of Accounting

Limitations of accounting are details discussed.

1.Accounting is not Fully Exact: Although most of the transactions are recorded on the basis of evidence such as sale or purchase or receipt f cash, yet some estimates are also made for ascertaining profit or loss.

2. Accounting does not Indicate the Reliable Value: The Balance Sheet does not show the amount of cash that the firm may realize by the sale of all the assets.

This is because many assets are not meant to be sold, they are meant for use and are shown at cost less depreciation that may have been written off.

3. Accounting ignores the Qualitative Elements: Accounting is an art of recording financial matters only, therefore qualitative elements are never depicted by financial statements. The quality of staff is one of several features.

It is the other limitations of accounting.

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4.Accounting Ignores Effect of Price Level Changes: The value of money always changes due to inflation. Accounting statements are prepared at historical cost, Money, as a measurement unit, changes in value. It does not remain stable.

Unless price level changes are considered while preparing financial statements, accounting information will not show true financial results.

5.Accounting may lead to Window Dressing: The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statements in a way to show the better position than what it is actually.

In this situation, income statement or Profit and Loss Account fails to provide a true and fair view of the result of operations and the Balance Sheet fails to provide a true and fair view of the financial position of the enterprise. It is the main limitation of accounting.

6.Unrealistic Information: Accounting information may not be realistic since accounting statements are prepared following the accounting concepts and conventions. For example, under the going concern concept, it is taken the business will continue for a foreseeable future.

Accordingly, assets are recorded at cost and depreciation over their useful life. The assets may not be actually realizable at book value.

7.Recommendation of alternative methods: There exists an application of alternative methods in determining depreciation of assets and valuation of stock etc.

Information is misleading if an alternative method is used to achieve a particular object.

8.Accounting never shows the market value of assets or business: Accounting information never shows the value which the firm may realize by the sale of all the assets. As it is against the accounting principles to show marker value in books. It is because may assets are nor meant to be sold.

Quick Revision Limitation of Accounting : i. Accounting records only those transactions and events which can be measured in terms of money. Qualitative elements are ignored Ex.No. of honest employees.

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ii. Under existing accounting systems accounting is maintained considering historical cost ignoring current changed value. iii. There are some transactions that are recorded on the basis of estimation. for ex., Estimating the useful life of an asset, providing for doubtful debts, net realizable value of closing stock, etc. iv. window dressing = manipulation of accounting in a way so as to conceal vital facts.

Thus income statement fails to provide a true and fair view of financial information of the business. v. Although in accounts, most of the transactions & events are recorded on the basis of evidence and supporting documents, yet some estimates are also made for ascertaining profit and loss. But estimates can not be perfect.

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