Financial accounting is the only branch of accounting and it is not perfect. There are large numbers of limitations which open new way to use other tools of accounting. To know what are the main limitations of financial accounting. It is very necessary for accountants. Accountants are often blind to these limitations. So, I am covering its limitation a lot of ground. Read below and understand:-
1. Financial accounting is of historical nature Net effect of transactions are recorded in financial accounting which has happened in past. These accounts is just postmortem of all events of business in past .These record does not help for future planning and other managerial decisions. Financial accounting shows the profitability of business but it is failure to tell that is it good or bad. Financial accounting is also failure to know the reasons of low profitability position.
2. Financial accounting deals with overall profitability Accounts of business are made by a way which shows only overall profitability .It does not shows net profit per product , or per department or according to job . Thus it is very difficult to find all such activities which do not give profit. So, it creates inefficiency in business activities.
3. Absence of full disclosure of facts In financial accounting we record only those activities and transactions which we can show or describe in money. There are many other facts of business which are nonfinancial and nonmonetary like efficient management, demand of products of firm, good relations in industry , good working environments which cannot be known by financial accounting .
4. Financial reports are interim report of business Financial statements made by financial accounting is the interim report of firm’s all business work but financial position and profitability which are shown in it is not fully true . Due to adopting cost concept, all transactions are recorded on it real cost but by changing in the time; it is the need of time to adjust cost of assets and liabilities according to inflation of market. Because, financial accounting does not records according to inflation so its result does not show true position of business.
5. Incomplete knowledge of costs From cost point of view, financial accounting is incomplete. In financial accounting, accountant does not calculate each and every product’s total cost. So, financial accounting does not help to determine the price of product of business.
6. No provision of cost control Financial accounting does not help business organization for controlling the cost as there is no provision of controlling cost in it. In financial accounting, we write cost, if we pay any expenses. Thus there is no provision of improvement in financial accounting. Except this, there is no any other way to inspect all expenses.
7. Financial statements are affected from personal judgment Many events of financial statements are affected from personal judgment of accountant. Method, rate of provision of doubtful debts and valuation method are decided by accountant. Thus, financial statements do not show true and fair view of business.
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Topic: Limitations of Financial Accounting
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