Question

Limitations of accounting include ______________.

• A. ignores qualitative elements
• B. ignores price level changes
• C. involves subjectivity
• D. all of above

Answer 1

The correct option is D all of above

Although accounting give us a systematic picture of our business transaction and events, it has some limitations also which are as follows:

1. Monetary transactions - Accounting is limited to monetary transactions only. Non-monetary transactions do not find place in accounting. It excludes qualitative elements like management reputation, employee morale etc.

2. 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. during inflation and deflation, financial position depicted by Balance sheet may not come true.

3. Accounting does not indicate the Realisable value - The Balance sheet does not show the amount of cash which the firm may realise by the sale of all the assets, as assets are meant for use and are shown at cost less depreciation that may have been written off.

4. Accounting may lead to window dressing - The term window dressing means manipulation of accounts so as to conceal important facts and present the financial statements in such a way as to show better position than what it actually is. In this situation profit and loss account fails to provide a true and fair view of the results of the operations and the Balance sheet fails to provide a true and fair view of the financial position of the enterprise.