Limitations of Financial Accounting

Following are the limitations:

i.

Financial accounting is influenced by personal judgments' 'Convention of objectivity' is respected in accounting but to record certain events estimates have to be made which requires personal judgment. It is very difficult to expect accuracy in future estimates and objectivity suffers. For example, in order to determine the amount of depreciation to be charged every year for the use of fixed asset it is required estimation and the income disclosed by accounting is not authoritative but 'approximation'. Even many events of financial statements are affected from personal judgement of accountant. Method of calculating depreciation, rate of provision of doubtful debts and stock valuation method are decided by accountant. Thus, financial statements do not show true and fair view of business.

ii.

Financial accounting is of historical nature Net effect of transactions are recorded in financial accounting which has happened in past. These accounts is just post-mortem of all events of business in past .These record does not help for future planning and other managerial decisions. Financial accounting shows the profitability of business but it is failure to tell that is it good or bad. Financial accounting is also failure to know the reasons of low profitability position.

iii.

Financial accounting does not provide timely information

Financial accounting is designed to supply information in the form of statements (Balance Sheet and Profit and Loss Account) for a period normally one year. So the information is, at best, of historical interest and only 'post-mortem' analysis of the past can be conducted. The business requires timely information at frequent intervals to enable the management to plan and take corrective action. For example, if a business has budgeted that during the current year sales should be Rs. 12,00,000 then it requires information whether the sales in the first month of the year amounted to Rs. 10,00,000 or less or more? Traditionally, financial accounting is not supposed to supply information at shorter interval less than one year. With the advent of computerized accounting now various software, that are available in the market, displays monthly profit and loss account and balance sheet to overcome this limitation.

iv.

Financial Accounting does not provide detailed analysis The information supplied by the financial accounting is in reality aggregates of the financial transactions during the course of the year. Of course, it enables to study the overall results of the business the information is required regarding the cost, revenue and profit of each product but financial accounting does not provide such detailed information product- wise. For example, if business has earned a total profit of say, Rs. 5,00,000 during the accounting year and it sells three products namely petrol, diesel and mobile oil and wants to know profit earned by each product financial accounting is not likely to help him.

v.

Financial Accounting does not disclose the present value of the business In financial accounting the position of the business as on a particular date is shown by a statement known as 'Balance Sheet'. In Balance Sheet the assets are shown on the basis of "Continuing Entity Concept". Thus it is presumed that business has relatively longer life

and will continue to exist indefinitely, hence the asset values are 'going concern values.' The 'realized value' of each asset if sold to-day can't be known by studying the balance sheet.

vi.

Financial accounting deals with overall profitability Accounts of business are made by a way which shows only overall profitability .It does not shows net profit per product , or per department or according to job . Thus to find difficult to all activities which do not give profit. So, it creates inefficiency in business activities.

vii.

Absence of full disclosure of facts In financial accounting we record only those activities and transactions which we can show or describe in money. There are many other facts of business which are non-financial and nonmonetary like efficient management, demand of products of firm, good relations in industry, good working environments which cannot be known by financial accounting.

viii.

Financial reports are interim report of business Financial statements made by financial accounting is the interim report of firms all business work but financial position and profitability which are shown in it is not fully true . Due to adopting cost concept, all transactions are recorded on it real cost but by changing in the time; it is the need of time to adjust cost of assets and liabilities according to inflation of market. Because, financial accounting does not records according to inflation so its result does not show true position of business.

ix.

Incomplete knowledge of costs From cost point of view, financial accounting is incomplete. In financial accounting, accountant does not calculate each and every products total cost. So, financial accounting does not help to determine the price of product of business.

x.

No provision of cost control Financial accounting does not help business organization for controlling the cost. Because, there is no provision of controlling cost in it. In financial accounting, we write cost, if we paid any expenses. Thus there is no provision of improvement in financial accounting. Except this, there is no any other way to inspect all expenses.

xi.

No detailed cost information Financial accounting does not provide detailed information for each product, process, job or operation. It only provides information regarding income and expenditure, assets and liability of the organization on a particular date.

xii.

No classification of cost Financial accounting does not classify cost into direct and indirect, fixed & variable, controllable, uncontrollable, normal and abnormal cost etc. It only divides expenditure in to two categories as Capital and Revenue.

xiii.

No helpful in price fixation Financial accounting does not provide adequate information for fixation of selling prices of the product produced or services rendered by the business. It is not also able to prepare tender or quotations.

xiv.

No control on cost Financial accounting does not provide proper system of controlling to various elements of cost, which is material labour and expenses. Cost control procedure can be adopted by setting standards, but it lacks in financial accounting.

xv.

Financial accounting permits alternative treatments Accounting is based on concepts and it follows generally accepted principles" but there exist more than one principle for the treatment of any one item. This permits alternative treatments within the framework of generally accepted principles. For example, the closing stock of a business may be valued by anyone of the following methods: FIFO (First-in- First-out), LIFO (Last-in-First-out), Average Price, Standard Price etc., but the results are not comparable.

xvi.

Financial Accounting does not disclose the present value of the business In financial accounting the position of the business as on a particular date is shown by a statement known as 'Balance Sheet'. In Balance Sheet the assets are shown on the basis of "Continuing Entity Concept. Thus it is presumed that business has relatively longer life and will continue to exist indefinitely, hence the asset values are

'going concern values.' The 'realized value' of each asset if sold to-day can't be known by studying the balance sheet.