Accounting is helpful to business in assessing their worth i.e., profit, loss, assets and liabilities. It enables the business in deciding its future line of action on the basis of information. supplied. Though logical conclusion can be derived from accounting but it can never be taken as granted that the fact supplied by Accounting are cent per cent true. They may be false, blased and manipulated. Accounting has the following limitations.
- Incomplete information: Accounting records only those transactions which are financial in nature. It records only the quantitative aspect of our transactions. Transactions of a non-financial nature do not find place in accounting. Certain very important information such as competency of the management, change in the economic and political situations, Government policies, competitions in the market and change in consumers preference etc. are not recorded in accounting though they affect the financial soundness of the business.
- Inexactness: Accounting assesses profit or loss of the business on the basis of both the real and assumed estimates. Accountants make the valuation of stock, determine the method of depreciation and maintain various reserves and provisions in any way, they like. Different firms have their own different methods, so the results for the business will the change in the practice.
- Showing valueless assets: There are certain assets which do not have real value but they are shown in our Balance Sheet. These assets are goodwill, patents, preliminary expenses, discount on issue of share etc. Showing these assets in the books of accounts makes its results doubtful.
- Manipulation: Accounting results are based upon the information supplied to it. The management may be blased and feed manipulative information to prove its point of view. Accountants can show the result of business, as desired by the owners of the business. This may be done by omitting certain accounts, increasing or decreasing the amount of certain accounts, under - estimating or over - estimating the value assets. For example, if purchases of furniture is shown as purchases of goods the profit will reduce.
- Ignorance about the present value of business: While maintaining books of accounts we follow going concern concepts i.e., the business will be carried on for infinite period. With this principle in view, we show the value of our assets in the balance sheet at its book value not at the market value. Sometimes certain assets may be valueless in the market but we continue to show it in the books of accounts, Accounting, in this way fails to show the present sale value of the business.
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