Accounting has already achieved a wide acceptability and recognition as an important applied branch of knowledge. Despite its huge advantages, one should have a clear concept of its limitations and disadvantages.
Here are the nine limitations of accounting are;
- Recording only monetary items.
- Time value of money.
- Recommendation of alternative methods.
- Restrain of accounting principles.
- Recording of past events.
- Allocation of problem.
- Maintaining secrecy.
- Tendency for secret reserves.
- Importance of form over substance.
These limitations stated above are explained below;
1. RECORDING ONLY MONETARY ITEMS
As per accounting principles only the events measurable in terms of money are recorded in the books of accounts. But events of great importance if not measurable in terms of money are not accounted for. For that reason recorded accounting information fails to exhibit the exact financial position of a business concern.
2. TIME VALUE OF MONEY
Under accounting system money value is treated constant. But the value of money always changes due to inflation. Under existing accounting systems accounts are maintained considering historical cost ignoring current changed value. As a result the accounts maintained fail to exhibit the exact financial position of a business concern.
3. RECOMMENDATION OF ALTERNATIVE METHODS
There exists application of alternative methods in determining depreciation of assets and valuation of stock etc. Information regarding activities of business is expressed in a misleading way if an alternative method is used to achieve a particular object.
4. RESTRAIN OF ACCOUNTING PRINCIPLES
Exhibited accounting information cannot always exhibit true and fair picture of a business concern owing to limitations of accounting principles used. For example, Fixed assets are shown after deducting depreciation. In case of inflation, the value of fixed assets shown in the accounts does not correspond to the real position.
5. RECORDING OF PAST EVENTS
In Accounting past events are accounted for. But naturally there is no system of recording events that may occur in future.
6. ALLOCATION OF PROBLEM
Allocation process is an important problem in accounting system. The value of fixed assets is exhausted charging depreciation for allocated period. The useful life of fixed assets is fixed up hypothetically which does not stand accurate in most cases.
7. MAINTAINING SECRECY
Secrecy cannot be ensured for involvement of many employees in accounting work although maintaining secrecy is very important.
8. TENDENCY FOR SECRET RESERVES
Often management creates secret reserves intentionally by increasing or decreasing assets and liabilities for which total financial picture of an organization is not reflected.
9. IMPORTANCE OF FORM OVER SUBSTANCE
At the time of preparing accounts for a particular period emphasis is laid on form, table etc. instead of giving importance to exhibition of substantial information.
10. PERSONAL BIASEDNESS
In some cases, some events are measured on the basis of some estimates. In such cases, judgment of the person who is estimating the events plays a vital role in accounting. For example, charging of depreciation is based on mere estimates, useful life of the asset and estimated scrap value of the asset. In this regard the judgment of the accountant may differ from person to person. So we can say that accounting gets influenced by personal judgments.
11. FRAUD AND MANIPULATIONS
Accounting principles are not static. Information contained in accounting may be manipulated by the accountants. There are several methods of recording the value of unsold stock or charging depreciation etc. By adopting different methods, the position of net profit or assets can be increased or decreased depending on the requirement of the management. It means accounting is subject to window dressing and it fails to depict the true financial position of the enterprise if the accounts were not drawn properly.