Limitations Of Accounting
The followings are the main limitations of Accounting.1.
Accounting records only those transactions which can be measured in
monetary terms.
2. Accounting transactions are recorded at cost in the books.The
effect of price level changes is not brought into the books with
the result that comparison of the various years becomes difficult.
For example, the sale to total asset in 2009 would be much higher
than in 2002 due to rising prices , fixed assets being shown at the
cost and not at market price.
3. Accounting statements are prepared by following basic
concepts and conventions. Therefore the accounting information may
not be realistic.
4. Accountant may select any method of depreciation , valuation
of stock, amortisation of fixed assets , treatment of deferred
revenue expenditure. Therefore accounting statements are influenced
by the personal judgement of the accountant.
Limitations
Department wise, product wide, unit wise datas cannot be
provided.Control over materials and laborers and not
adequate.Financial accounting provides only the net results of the
overall performances of the business, however department wise,
process wise, product wise and unit wise profits cannot be
revealed.Wages and Labour charges are not recorded by jobs,
departments or services.Financial Accounting neither classifies
expenses as direct or indirect nor points out controllable and
uncontrollable items in overhead costs.Nature of Financial
accounting is historical; therefore data summarization is only in
the end of the year or accounting period. Consequently, there are
no predetermined costs which help in taking corrective action at an
appropriate state.Financial accounting does not analyze losses due
to idle plant and equipment, defective materials, inefficient
labour etc. Besides, it doest not differentiate between avoidable
and unavoidable losses.It fails to provide adequate information for
reports to outside agencies like banks, investment companies and
even the government.Management wont get any guidance for proper
planning, control and decision making, as the financial account is
maintained only to find out the trading results during a
period.Data is not readily available for fixing prices of products
and services.
Subjective MeasurementAccountants have to attach a monetary
value to every event or transaction that has taken place within the
organization. Sometimes the monetary value of the transaction is
impossible to be ascertained. Consider the case of depreciation.
Accountants can at best provide estimates of the depreciation that
should have taken place given the scale of operations. However,
these estimates are usually way off the mark. This makes accounting
policies open to debate as well as manipulation.
Qualitative FactorsAccountants try to attach a monetary value to
everything. The things they cannot attach a monetary value to are
not accounted for! Consider the case of goodwill. Until the
organization has explicitly paid for the goodwill it purchased from
another company, it cannot account for goodwill. According to
accountants, the goodwill generated by the firm internally is
worthless. We all know that this is not the case and therefore
accounting is flawed as far as goodwill is concerned.
Unstable Unit of AccountAccountants have to measure all
transactions in a single unit of account. This unit of account is
usually the currency that is being used in a particular country.
However, it is common knowledge that the value of currencies is not
stable. Inflation, deflation and such other forces make currency
values dynamic. When accountants express assets purchased in last
years rupees with the same unit as purchased by this years rupees,
it presents a distorted image. Many companies have low book values
because their assets were purchased a long time back during periods
of no inflation.
No Information about Opportunity CostAccountants provide
information about what has happened. However, management would be
better off if they had information about what could have happened
if they used their resources in the optimum manner. This feature is
also lacking in accountancy making its usefulness limited from the
managerial point of view.
