Limitations of accounting

i) Accounting information is expressed in terms of money. Non-monetary events or transactions, however important they may be, are completely omitted.

(ii) Fixed assets are recorded in the accounting records at the original cost, that is, the actualamount spent on them plus, of course, a incidental charges. In this way the effect of inflation (or deflation) is not taken into consideration. The direct result of this practice is that balance sheet does notrepresent the true financial position of the business.

(iii) Accounting information is sometime based on estimates; estimates are often inaccurate.For example, it is not possible to predict with any degree of accuracy the actual useful life of an asset for the purpose of depreciation expense.

(iv) Accounting information cannot be used as only test of managerial performance on the basis of more profits. Profits of a period of one year can readily be manipulated by omitting such cost of advertisement, research and development, depreciation and soon.

(v) Accounting information is not neutral or unbiased. Accountants calculate income as excess of revenue over expenses. But they consider only selected revenues and expenses. They do not, for example, include cost of such items as water or air pollution, employee’s injuries etc.

(vi) Accounting like any other discipline has to follow certain principles which in certain cases are contradictory. For example current assets (e.g., stock of goods) are valued on the basis of cost or market price whichever is less following the principle of conservatism. Accordingly the current assets may be valued on cost basis in some year and at market pricein other year. In this manner, the rule of consistency is not followed regularly.

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