explain in brief any four limitations of accounting.
Answers
1. Transactions of non-monetary nature do not find place in accounting. Accounting is limited to monetary transactions only. It excludes qualitative elements like management reputation, employee morale, labour strike etc.
2. Cost concept is found in accounting. Price changes are not considered. Money value is bound to change often from time to time. This is a strong limitation of accounting.
3. Acceptable alternatives are so broad based that comparisons are likely to be confusing or misleading. For instance, inventory cost may be ascertained by LIFO or FIFO; or stock may be evaluated at cost price or market price.
4. Accounting policies are framed by the Accountant. The figures of balance sheet are largely resulted by personal judgement of accountant hence it is the subjective factor that prevails in accounting and objective factor is ignored.
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, amortization of fixed assets , treatment of deferred revenue expenditure. Therefore accounting statements are influenced by the personal judgement of the accountant.