Six Limitations of Accounting – Discussed!

Some of the limitations of accounting are as follows:

1. Historical in Nature:

Accounting is historical in nature and reflects the past position of business organization.

2. Records Only Monetary Transactions:

Accounting provides only incomplete information as accounting records only those transactions which can be expressed and measured in terms of money. It is worth mentioning that there are a lot of non-financial transactions that are important and have a significant impact on the working of enterprise. Due to their non-financial nature, they do not get recorded in books of accounts. For example, ineffective control prevailing in the organization, inefficient employees, market conditions, change of government policies etc.

3. Price Level Changes:

The accounting statements do not show the effect of price level changes on the value of assets since it is based on historical cost. Thus the financial position, as depicted by the Balance Sheet may not come true in case of inflation or deflation.

4. Window Dressing:

Accounting principles are not static. Information contained in accounting may be manipulated by the accountants. There are several methods of recording the value of unsold stock or charging depreciation etc. By adopting different methods, the position of net profit or assets can be increased or decreased depending on the requirement of the management. It means accounting is subject to window dressing and it fails to depict the true financial position of the enterprise if the accounts were not drawn properly.

5. Personal Biasedness:

In some cases, some events are measured on the basis of some estimates. In such cases, judgment of the person who is estimating the events plays a vital role in accounting. For example, charging of depreciation is based on mere estimates, useful life of the asset and estimated scrap value of the asset. In this regard the judgment of the accountant may differ from person to person. So we can say that accounting gets influenced by personal judgments.

6. Real Value not Known:

Accounting is based on various generally accepted accounting principles. Sometimes, the records prepared in accounting fail to show a true and fair position of profitability and financial soundness of the business enterprise. For example, fixed assets are recorded at their cost price and as per the going concern concept, business always goes on.

It means the actual value of assets is known on the date on which the business is actually sold. The value of business, determined during the life of the business, differs from the amount of actual realized value of the assets.

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