Limitations of Accounting, Disadvantages of Accounting (Detailed)

Limitations of Accounting, What are the Limitations of Accounting: Accounting is not fully exact: Accounting is influenced by the personal judgment in respect of various terms.People are bound to have different ideas and the estimates will naturally differ from person to person. Thus this will lead to the different amount of profit shown by a different person.Thus the profit cannot be treated as exact.

The following are the limitations of accounting:

(i) Accounting information is expressed in terms of money: The accountant measures only those events that are of financial nature i.e. capable of being expressed in terms of money. Non-monetary items or events which cannot be measured are not recorded in accounting.

(ii) Accounting information is based on estimates: Some accounting data are based on estimates and some estimates may be inaccurate.

(iii) Accounting information may be biased: Accounting information is not without personal influence or bias of the accountant. In measuring income, accountant has a choice between different methods of inventory valuation, deprecation methods, treatment of capital and revenue items etc. Hence, due to the lack of objectivity income arrived at may not be correct in certain cases.

(iv) Fixed assets are recorded at the original cost: The values of fixed assets change over time and so there may be a great difference between the original cost and current replacement cost. Balance sheet may not show true and fair view of the financial position on a particular date.

(v) Accounting can be manipulated: Accounting information may not be used as the only test of managerial performance as profits can be manipulated or misrepresented.

(vi) Money as a measurement unit changes in value: The value of money does not remain stable. Unless price level changes are considered in measurement of income, the accounting information will not show true financial results.