Briefly describe Limitations of Accounting.
Class 11th
Answers
Answer:
One of the biggest limitations of accounting is that it cannot measure things/events that do not have a monetary value. If a certain factor, no matter how important, cannot be expressed in money it finds no place in accounting. Some very important qualities like management, loyalty, reputation, etc find no place on the balance sheet or the income statement.
No Future Assesment
The financial statements show the financial position of the firm on the date of preparation. The users of the statement are more interested in the future of the company in the short term and long term. However, accounting does not make any such estimates.
And due to the dynamic nature of the business environment, a lot can change between such dates. Auditors sometimes do disclose the important events occurring after the balance sheet date to rectify these limitations of accounting.
Historical Costs
Accounting often uses historical costs to measure the values. This fails to take into consideration factors such as inflation, price changes, etc. This skews the relevance of such accounting records and information. This is one of the major limitations of accounting.
Accounting Policies
There is no global standard in accounting policies. In India, we follow the Accounting Standards. Americans follow the GAAP and then there are the international standards, namely the IFRS. And if a global company operates in more than one country, there may be confusion.
Not all accounting policies follow the same line of thinking, and conflicts may arise due to this. It has long been said that the whole world must agree on uniform accounting policies but this has not happened yet.
Estimates
Sometimes in accounting estimation may be required as it is not possible to establish exact amounts. But these estimates will depend on the personal judgment of the accountant. And estimates are extremely subjective in nature. They are basically a person’s guess of future events. In accounting, there are many cases where such estimates need to be made like provision of doubtful debt, methods of depreciation, etc.
Verifiability
An audit of the financial statements does not guarantee the correctness of such statements. The auditor can only assure that the statements are free from error to the best of his judgment.
Errors and Frauds
Accounting is done by humans, so there will always be the scope of human errors. There is also the fear of possible manipulation of accounts to cover up a fraud. Since fraud is deliberate, it is that much harder to spot. This is one of the most dreaded limitations of accounting.
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Answer:
Explanation:
1. Influenced by personal judgements
2. Based on accounting concepts and convention s
3. Incomplete information
4. Ommision of qualitative information s
5. Based in historical costs
6. Affected by window dressing
7. Unsuitable for forecasting ....