Limitations Of Accounting

The followings are the main limitations of Accounting.

1. Accounting records only those transactions which can be measured in
monetary terms.

2. 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 sale to
total asset in 2009 would be much higher than in 2002 due to rising prices ,
fixed assets being shown at the cost and not at market price.

3. Accounting statements are prepared by following basic concepts and

conventions. Therefore the accounting information may not be realistic.

4. Accountant may select any method of depreciation , valuation of stock,

amortisation of fixed assets , treatment of deferred revenue expenditure.
Therefore accounting statements are influenced by the personal judgement
of the accountant.

Limitations

Department wise, product wide, unit wise datas cannot be provided.

Control over materials and laborers and not adequate.
Financial accounting provides only the net results of the overall performances
of the business, however department wise, process wise, product wise and
unit wise profits cannot be revealed.
Wages and Labour charges are not recorded by jobs, departments or

services.
Financial Accounting neither classifies expenses as direct or indirect nor
points out controllable and uncontrollable items in overhead costs.
Nature of Financial accounting is historical; therefore data summarization is
only in the end of the year or accounting period. Consequently, there are no
predetermined costs which help in taking corrective action at an appropriate
state.
Financial accounting does not analyze losses due to idle plant and equipment,
defective materials, inefficient labour etc. Besides, it doest not differentiate
between avoidable and unavoidable losses.
It fails to provide adequate information for reports to outside agencies like
banks, investment companies and even the government.
Management wont get any guidance for proper planning, control and decision
making, as the financial account is maintained only to find out the trading
results during a period.
Data is not readily available for fixing prices of products and services.

Subjective Measurement
Accountants have to attach a monetary value to every event or transaction
that has taken place within the organization. Sometimes the monetary value
of the transaction is impossible to be ascertained. Consider the case of
depreciation. Accountants can at best provide estimates of the depreciation
that should have taken place given the scale of operations. However, these
estimates are usually way off the mark. This makes accounting policies open
to debate as well as manipulation.

Qualitative Factors

Accountants try to attach a monetary value to everything. The things they

cannot attach a monetary value to are not accounted for! Consider the case
of goodwill. Until the organization has explicitly paid for the goodwill it
purchased from another company, it cannot account for goodwill. According
to accountants, the goodwill generated by the firm internally is worthless. We
all know that this is not the case and therefore accounting is flawed as far as
goodwill is concerned.

Unstable Unit of Account

Accountants have to measure all transactions in a single unit of account. This
unit of account is usually the currency that is being used in a particular
country. However, it is common knowledge that the value of currencies is not
stable. Inflation, deflation and such other forces make currency values
dynamic. When accountants express assets purchased in last years rupees
with the same unit as purchased by this years rupees, it presents a distorted
image. Many companies have low book values because their assets were
purchased a long time back during periods of no inflation.

No Information about Opportunity Cost

Accountants provide information about what has happened. However,
management would be better off if they had information about what could
have happened if they used their resources in the optimum manner. This
feature is also lacking in accountancy making its usefulness limited from the
managerial point of view.