What are the limitations(disadvantages) of Accounting?

 Let us see, as to, What are the limitations(disadvantages) of Accounting? This would help us to know the demerits and disadvantages of Accounting and it's scope as well.

What is Accounting? It's Meaning, Definition, Scope

 It is the art of recording, summarizing, analyzing, and reporting business transactions of the enterprises by Financial Statements. These statements include the income statement, balance sheet, and cash flow statement

In 1966, American Accounting Association defined it as, "the process of identifying, measuring, communicating financial information to permit judgements and decisions by users of accounts."

Accountancy refers to a systematic knowledge of accounting. It tells us how to prepare the books of accounts and how to summarize this information to communicate it to the users of information. The users are creditors or suppliers of raw materials and finished goods, debtors or customers, investors, employees, tax authorities to levy a tax, management to take useful decisions, government and their agencies, and the general public. The users are interested in the performance or profit or loss of a business entity.

What are the demerits, disadvantages, limitations of Accounting?

1. Financial statements are prepared based on Historical costs. Thus balance sheet may be misleading if there is a fluctuation in historical cost and market value of assets and liabilities recorded

2. Financial statements may not be comparable if the business entities use different accounting policies and  practices

3. Information contained in the financial statements could be misleading and false if management wants to disclose the healthy financial performance and position even if it making losses.

4. Accounting is a cumbersome and technical subject that is not easy to understand for a common man unless he possesses sound knowledge of the subject.

 

5. Cost controls are not possible as they are known at the end of the year after preparing financial statements

6. It doesn't record the changes in price fluctuations and does not consider the market value of assets in the balance sheet

7. Accounting information may be based on Estimates. These estimates may be inaccurate and  not reliable which may give incorrect or misleading information.

8. Future probable incomes or profits are ignored and will not be recorded. But future expected losses are accounted for and provided with provision as well.

9. Management may intentionally create secret reserves by increasing or decreasing the values of assets and liabilities in the balance sheet. This will again give incorrect or misleading  information in financial statements.

10. Implementing complete Accounting is Costly and Expensive which small organizations may not afford the same. Recording all the business transactions, maintaining books of accounts and preparing financial statements is costly and expensive for small business entities

Conclusion

Thus, we have come to know, as to, what are the top 10 demerits or disadvantages or limitations of Accounting. Such as Financial statements are  based on historical cost and may give misleading and incorrect information. Implementing this entire system is costly and expensive for small business entities. Future anticipated incomes and gains are ignored or not recorded as well.