Accounting in a very simple sense is maintaining a record of varied activities. Thus, Accounting is some things that are used almost by everyone in their daily lives. In our lifestyle, we maintain a record of varied transactions or activities. Although accounting has several benefits it has certain limitations as well which are discussed below.
Limitations of Accounting
Based on Personal Judgement: Even though all the business transactions entered in the books are based on proofs but still there are certain transactions that are recorded on the individual judgment of the accountants. For example, a method for valuation of stock may differ from person to person. Similarly, the method of providing depreciation can be varied. This will lead to different financial results by different people and hence the profit so ascertained cannot be considered as
accurate or exact.
Ignores Qualitative Aspects of Transaction: In accounting, only those transactions are recorded in the books which are capable of being measured in terms of money. The qualitative aspects of transactions are ignored even if they have a significant impact on the business.
Ignores Changes in Price Level: The items are recorded in the books of accounts at their historical costs. It doesn’t take into consideration the changes within the price index of the things within the market. Thus, the financial results disclosed by such financial statements fail to reveal truth financial position of the business.
Based on Accounting Concepts and Conventions: The accounts of a business are maintained by following various accounting concepts and conventions. Hence, the net results shown by the accounts are not considered reliable.
Window Dressing: Window dressing implies showing false business results as compared to actual results. The accountant may adopt a practice of showing the manipulated figures within the accounts so as to point out a far better financial position of the business. In such a situation, financial statements fail to reveal the true and actual financial position of the business.
Forecasting not Possible: Accounting is based on past events and transactions and does not take into consideration the rapid changes in the market such as changes in the demand for products, changes in the cost of raw materials, etc. Thus, it is not appropriate for making forecasting.
Also, Read Role of Accounting