6 Limitations of Accounting Standards

Accounting Standards are the statements of code of practice from the regulatory accounting bodies that are to be observed within the preparation and presentation of monetary statements. In layman’s terms, accounting standards are the written documents issued by the expert institutes (ICAI) or other regulatory bodies covering various aspects of measurement, treatment, presentation, and disclosure of accounting transactions. Limitations of Accounting Standards are

Limitations of Accounting Standards

Inflexible Framework: An accountant has to follow that method only which is mentioned in the accounting standards while preparing accounts. It is not necessary that a method appropriate in one situation would be applicable in other situations as well.

Biased: Accounting standards may be subject to lobbying or government pressure. Thus, in order to give unfair advantages to big corporate houses, the standards might be compromised.

Cost to Comply: We live in a dynamic environment and in order to keep up with the needs of business from time to time, new accounting standards are issued by the ICAI and in order to comply with these the company has to incur various costs.
Sometimes a company has to design new procedures, which require large financial investment in the form of employee training cost, labour cost, system up-gradation, etc.

Conceptual Weakness: Earlier standards were not based on a sound conceptual framework of accounting but the ICAI is committed to rectify these.

Affected by errors: They have been developed by human beings. So, there can be a chance of errors while developing these standards.

Drafted within the ambit of law: They must adhere to the law of the country. It cannot go beyond the boundaries prescribed by the law of the country.


What is Objectivity Principle?

According to the objectivity principle, accounting should be free from personal bias. That is, the accounting transaction should be supported with written documents such as cash memos, invoices, etc.

What is Correlation?

Correlation is a statistical tool that measures the quantitative relationship between different variables. It studies the degree and intensity of the connection between the two variables. The relationship between two variables is studied with the help of a statistical tool i.e. ‘Correlation’.