Briefly explain the limitations of Accounting.
Briefly explain the limitations of Accounting.
Limitations of Accounting :
1. Financial accounting is not absolutely exact: Accounting information is not necessarily exact. A lot of information presented in the books of account are based on personal judgment. There cannot be the absolute guarantee of accuracy when assumptions are based on personal opinion.
2. Financial accounting does not show the exact worth of the business: The values of most of the assets in the books are presented on the basis of their purchase price, which is known as historical figures. Their present market values or realizable values are usually quite different. In other words, the books of accounts fail to show the exact value of assets or liabilities.
3. A problem with window dressing: Balance sheet figures are often modified to make it look better. This process conceals many weaknesses of the business. Thus the accounting information becomes unreliable for accurate judgment.
4. Worthless assets often are shown in the balance sheet: Several worthless items can appear in the balance sheet as the asset. This will project a wrong picture of the business.
5. No effect of inflationary trends: Currency is not a stable unit of measurement of value. Inflation can make the value of the currency itself different. Measurement with this “elastic tape” can give conflicting results
Limitations of Accounting :
1. Financial accounting is not absolutely exact: Accounting information is not necessarily exact. A lot of information presented in the books of account are based on personal judgment. There cannot be the absolute guarantee of accuracy when assumptions are based on personal opinion.
2. Financial accounting does not show the exact worth of the business: The values of most of the assets in the books are presented on the basis of their purchase price, which is known as historical figures. Their present market values or realizable values are usually quite different. In other words, the books of accounts fail to show the exact value of assets or liabilities.
3. A problem with window dressing: Balance sheet figures are often modified to make it look better. This process conceals many weaknesses of the business. Thus the accounting information becomes unreliable for accurate judgment.
4. Worthless assets often are shown in the balance sheet: Several worthless items can appear in the balance sheet as the asset. This will project a wrong picture of the business.
5. No effect of inflationary trends: Currency is not a stable unit of measurement of value. Inflation can make the value of the currency itself different. Measurement with this “elastic tape” can give conflicting results
