Question

Explain the four main limitations of financial accounting

Answer 1

Historic in Nature:

Since the financial accounting records all transactions relating to a particular period, it is rather historic in nature. In short, present financial information relating to a past period and not for the future although all financial decisions are taken on the basis of past financial data.


Recording Actual Cost:

The financial accounting records the actual cost only, the historical cost of the assets. The value of assets may be changed, but record only the cost of acquisitions of such assets. In other words, financial accounting does not record the price fluctuations or change in price level. As a result it does not present the correct information.

Difficulty in Price Fixation:
We know that the total cost of a product can be obtained only when all expenses relating to a product have been incurred. That is why it is not possible to ascertain the price of the product in advance for the purpose of estimated selling price. As total cost (i.e., fixed cost, variable cost, direct cost and indirect cost of a product) depends on many factors, all such factors cannot be supplied by financial accounting.

Difficulty in Price Fixation:

We know that the total cost of a product can be obtained only when all expenses relating to a product have been incurred. That is why it is not possible to ascertain the price of the product in advance for the purpose of estimated selling price. As total cost (i.e., fixed cost, variable cost, direct cost and indirect cost of a product) depends on many factors, all such factors cannot be supplied by financial accounting.

Supply Quantitative Information:

Financial accounting supplies quantitative information only through absolute figures which do not present always the required information although they are needful to the users. But relative financial information are more important and informative.