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Limitations of Accounting

Updated on May 20th, 2019 in Finance & Accounts

Limitations of Accounting

Accounting plays a very important role both for the company and shareholders. As through accounting, they get the financial position and all the transactions of the company. However, everything that has pros also has cons, similarly, there is a certain limitation of accounting. Let us see these limitations in brief:

Accounting Limitations

Accounting is Evolving

There are a few misguided judgments about accounting. Like the way that a Profit and Loss Statement demonstrates the correct profit or loss earned in a year, or that the balance sheet impeccably portrays the financial position of a firm.

Though truly accounting is definitely not an ideal science or craftsmanship or language yet. It has been developing for such huge numbers of years and keeps on advancing. The restrictions of accounting must be concentrated to comprehend it better.

Measurability

One of the greatest confinements of accounting is that it cannot measures things/events that do not have a financial value. If a specific factor, regardless of how significant, can’t be communicated in cash it finds no spot in accounting. Some significant characteristics like administration, faithfulness, reputation, and so on discover no spot on the income statement and balance sheet.

No Future Assessments

As the shareholder is more inclined towards the future fate of the company either short term or long term. Howsoever, the balance sheet under accounting demonstrates the financial position of the business on its preparation date but not the future assessments.

Furthermore, because of the dynamic nature of the business condition, a lot can happen between such dates. The auditors here and there to reveal the significant occasions happening after the balance sheet date to redress these accounting limitations.

Historical Costs

This is one of the significant limitations of accounting. This skews the pertinence of accounting records and data. As, accounting takes the historical cost to quantify the value that fails to take different factors into consideration, for instance, price-hike, inflation or deflation etc.

Accounting Policies

There is no worldwide standard in accounting approaches. In India, we pursue Accounting Standards. Americans pursue the GAAP and after that, there are the global norms, in particular, the IFRS. What’s more, if a worldwide organization works in more than one nation, there might be disarray.

Not all accounting approaches pursue a similar line of reasoning, and clashes may emerge because of this. It has for some time been said that the entire world must concur on uniform accounting policies however this has not occurred yet.

Estimates

Off and on, in accounting estimation might be required as it is beyond impossible to expect to build up precise amounts. In any case, these assessments will rely upon the individual judgment of the bookkeeper. They are essentially an estimate of the individual regarding the events that may take place in future. In accounting, there are numerous situations where such guesses need to be carried out such as depreciation methods, doubtful debt provisions and so on.

Errors and Frauds

Accounting is carried out by humans, so there will dependably be the extent of human errors. In addition to this, there can be times where there can be the possibility of accounts manipulation to hide the fraud. Since misrepresentation is conscious, it is a lot harder to spot. This is the most despicable limitation of accounting.

 

 

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