Question

Eplain the various limitations of accounting

Answer 1

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.

Answer 2

ANSWER :

The various limitations of accounting are as follows :-

• [1] Influenced by personal judgement : Accounting can't be considered as an exact science. Hence, the persons in charge of maintaining the accounts are required to exercise their personal judgments in respect of various items where alternative accounting treatments exist. Different persons are bound to have different opinions in respect of such matters. It will result different amount in the ascertainment of profit or loss of a business by different persons. Hence, accounting is influenced by personal judgement.

• [2] Based on Accounting Principles : The accounts of a business are prepared on the basis of a number of accounting concepts, principles and conventions. Hence, the profitability and the financial position disclosed by those accounts may not be realistic.

• [3] Incomplete information : Complete information can't be known from the accounting information. Accounting statements provide only the incomplete information because the actual profit or loss of a business can be known only the business is closed down.

• [4] Absence of qualitative information : There ia absence of qualitative information in accounting as accounts contain only those informations which can be expressed in term of money. Qualitative aspexts of business units are omitted from the books at all, as these can't be expressed in monetary terms.

• [5] Based on historical costs : Accounts of a business are maintained on the basis of historical costs. It means accounts are based on the cost of acquisition and as such figures shown in the financial statements do not show the effect of charges in price level because due to inflation the purchasing power of money decreases. As a result, the values of assets shown in the Balance Sheet are not helpful in estimating the true financial position of the business.

MORE TO KNOW :

Accounting is a man-made activity which has evolved over a period of time. It is a systematic exercise carried on for the purpose of recording, summarizing and interpreting the results for the users of the information.

• According to American Institute of Certified Public Accountants, "Accounting is the art of recording, classifying and summarizing jn a significant manner and in terms of money, transactions and events, which are, in part atleast, of a financial character, and interpreting the results therof."

• The object of accounting is to classify, summarize and interprete the business transaction to find out the accuracy of recorded data.