Unit-1 Limitation of Accounting Business Accounting | BBA First Year

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Limitations of Accounting

• Accounting has limitations;

Recording only monetary items

• According to accounting principles, only events measurable in money terms are recorded in the books of accounts. But events of great importance are not accounted for if they are not measurable in monetary terms.
• For this reason, recorded accounting information fails to reflect the accurate financial position of a business entity.
  

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Time value of money

• Money value is treated continuously under the accounting system.
• But the value of money always changes due to inflation. Under existing accounting systems accounts are maintained by considering historical cost ignoring current changed value.
• As a result, the accounts maintained fail to reflect the accurate financial position of a business concern.

Recommend of alternative methods

• Application of alternative methods exists in depreciation of assets and valuation of stocks etc.
• If an alternative method is used to achieve a particular objective then information about the activities of the business is presented in a misleading manner.

Reinforce accounting principles

• The accounting information displayed may not always reflect a true and fair picture of a business concern due to the limitations of the accounting principles used.

For example,

• Fixed assets are shown after deducting depreciation. In case of inflation, the value of fixed assets shown in the accounts does not correspond to the actual situation.

Recording of past events

• In accounting, past events are recorded. But naturally, there is no system to record future events.

Allocation of problem

• Allocation process is an important problem in accounting system. The value of fixed assets is eroded by charging depreciation for the allotted period.
• The useful life of fixed assets is determined hypothetically which does not fit in most of the cases.

Maintaining confidentiality

• Confidentiality cannot be ensured for the involvement of many employees in accounting work, although maintaining confidentiality is very important.

Tendency of secret storage

• Often management creates hidden reserves by deliberately increasing or decreasing assets and liabilities in a manner that does not reflect the total financial picture of an organization.

Importance of form rather than substance

• As per the Companies Act, it is mandatory to prepare the balance sheet in the prescribed form.
• Efforts are underway around the world to overcome these limitations. Without accounting, the economic activities of any society are neither possible nor legal.

Accounting Users

Accounting information of internal users

• Internal users are the individuals who run, manage, and operate the daily activities of an organization’s internal areas.

1. Owners and shareholders.
2. Director,
3. Manager,
4. Officer
5. Interior Department.
6. Employees
7. Internal Auditor.

External users of accounting information are:

• Creditor
• Investors
• Government
• Trading partners.
• Regulatory agencies.
• International agencies. standardization

8 users of accounting

1. Boss:

• The primary purpose of accounting is to provide owners with essential information related to their business. 

2. Management:

• In large business organizations there is separation of ownership and management functions. The management of such companies remains more concerned about accounting information because of their accountability to the owners for better performance of their concerns.

3. Creditor:

• Financial statements provide the information necessary to ascertain such a position.

4. Regulatory Agencies:

• Various governments and other agencies use accounting reports not only as a basis for tax assessment, but also to evaluate how well various business entities are operating under the regulatory framework.

5. Government:

• Governments around the world are using financial statements to compile statistics related to business units, which in turn help compile national accounts.

6. Potential Investors:

• Investors use a great deal of information in accounting reports to determine the relative merits of different investment opportunities.

7. Employees:

• Employees are interested in the earnings of the enterprise because their salary increases and payment of bonuses depend on the size of profits earned.

8. Researcher:

• Research scholars also use accounting data in their research into accounting theory as well as business matters and practices. In addition, those indirectly concerned about the business enterprise include financial analysts and consultants, the financial press and reporting, trade associations, labor unions, consumers, and the public at large. Thus, the list of actual and potential users of accounting information is large.