Limitations of Accounting
Although accounting may be heralded as being the language of the
business, it is definitely not error free. This has been highlighted by
the fact that accounting scams have occurred one after the other for
many years. In fact, even after stricter regulation and tightening of
accounting rules, accounting scams just don’t cease to stop.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major limitations of accounting.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major limitations of accounting.
- Subjective Measurement
Accountants have to attach a monetary value to every event or
transaction that has taken place within the organization. Sometimes the
monetary value of the transaction is impossible to be ascertained.
Consider the case of depreciation. Accountants can at best provide
estimates of the depreciation that should have taken place given the
scale of operations. However, these estimates are usually way off the
mark. This makes accounting policies open to debate as well as
manipulation.
Although accounting may be heralded as being the language of the business, it is definitely not error free. This has been highlighted by the fact that accounting scams have occurred one after the other for many years. In fact, even after stricter regulation and tightening of accounting rules, accounting scams just don’t cease to stop.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major limitations of accounting.
- Subjective Measurement
Accountants have to attach a monetary value to every event or
transaction that has taken place within the organization. Sometimes the
monetary value of the transaction is impossible to be ascertained.
Consider the case of depreciation. Accountants can at best provide
estimates of the depreciation that should have taken place given the
scale of operations. However, these estimates are usually way off the
mark. This makes accounting policies open to debate as well as
manipulation.
Although accounting may be heralded as being the language of the business, it is definitely not error free. This has been highlighted by the fact that accounting scams have occurred one after the other for many years. In fact, even after stricter regulation and tightening of accounting rules, accounting scams just don’t cease to stop.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major limitations of accounting.
- Subjective Measurement
Accountants have to attach a monetary value to every event or
transaction that has taken place within the organization. Sometimes the
monetary value of the transaction is impossible to be ascertained.
Consider the case of depreciation. Accountants can at best provide
estimates of the depreciation that should have taken place given the
scale of operations. However, these estimates are usually way off the
mark. This makes accounting policies open to debate as well as
manipulation.
- Qualitative Factors
-
Accountants try to attach a monetary value to everything. The things
they cannot attach a monetary value to are not accounted for! Consider
the case of goodwill. Until the organization has explicitly paid for the
goodwill it purchased from another company, it cannot account for
goodwill. According to accountants, the goodwill generated by the firm
internally is worthless. We all know that this is not the case and
therefore accounting is flawed as far as goodwill is concerned.
- Unstable Unit of Account
Accountants have to measure all transactions in a single unit of
account. This unit of account is usually the currency that is being used
in a particular country. However, it is common knowledge that the value
of currencies is not stable. Inflation, deflation and such other forces
make currency values dynamic. When accountants express assets purchased
in last year’s rupees with the same unit as purchased by this year’s
rupees, it presents a distorted image. Many companies have low book
values because their assets were purchased a long time back during
periods of no inflation.
- No Information about Opportunity Cost
Accountants provide information about what has happened. However,
management would be better off if they had information about what could
have happened if they used their resources in the optimum manner. This
feature is also lacking in accountancy making its usefulness limited
from the managerial point of view.
-
Accountants try to attach a monetary value to everything. The things
they cannot attach a monetary value to are not accounted for! Consider
the case of goodwill. Until the organization has explicitly paid for the
goodwill it purchased from another company, it cannot account for
goodwill. According to accountants, the goodwill generated by the firm
internally is worthless. We all know that this is not the case and
therefore accounting is flawed as far as goodwill is concerned.