Given below 8 Limitations Of Accounting.
Following are the main limitations of accounting:
1. Records only monetary transactions. Accounting records only those transactions which can be measured in monetary terms. Those transactions which cannot be measured in monetary terms as a conflict between production and marketing managers, efficient management, etc., may be very important for concern but not recorded in the business books.
2. Effect of price level changes not considered. 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 rate of sale to total assets in 2014 would be much higher than in 2006 due to rising prices, and fixed assets being shown at cost and not at market price.
3. No practical information. Accounting information may not be realistic as accounting statements are prepared by following basic concepts and conventions. For example, the going concern concept gives us an idea that the business will continue and assets are to be recorded at a cost but the book value which the asset is showing may not actually be realizable. Similarly, by following the principle of conservatism the financial statements will not reflect the true position of the business.
4. Personal bias of the accountant affects the accounting statements. Accounting statements are influenced by the personal judgment of the accountant. He may select any method of depreciation, valuation of stock, amortization of fixed assets, and treatment of accountant that will affect the preparation of accounting statements.
5. Permits alternative treatments. Accounting permits alternative treatments within generally accepted accounting concepts and conventions. For example, the method of charging depreciation may ve the straight lime method diminishing balance method, or some other method. Similarly, closing stock may be valued by FIFO(First-in-First-out) or LIFO(Last-in-First-out) OR Average Price Method. The application of different methods may give different results and results may not be comparable. Hence accounting can be manipulated.
6. Profit no real test managerial performance. Profit earned during an accounting period is not the real test of managerial performance. Profit may be shown in excess by manipulation of accounts by suppressing such costs as depreciation, advertisement, and research and development or taking the excess value of the closing stock. Consequently, a real idea of managerial performance may not seem ve available by manipulated profit.
7. Historical in nature. Usually, accounting supplies information in the form of a Profit and Loss Account and Balance Sheet at the end of the year. Thus, the information provided is of historical interest and only gives a post-mortem analysis of the past accounting information. For control and planning, purposes management is interested in quick and timely information which is not provided by financial accounting.
8. Window Dressing in Balance Sheet. When an accountant resorts to window dressing in the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of affairs of the business.
