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Limitations of Accounting

  • Ignores qualitative element: Since accounting is concerned with monetary matters only, the qualitative factors like loyalty and skills of the personnel, public relations etc. are ignored.
  • Estimation: Accounting only reports the estimated periodic results and not the true results since the true results can only be depicted on the winding up of the enterprise.
  • Not free from bias: Certain accounting estimates depend upon the personal judgment of the enterprise. Example – One can be biased while choosing a method of depreciation or valuation of inventory to manipulate the financial statements.
  • Ignores price level changes: Fixed assets are recorded at historical cost and not at the replacement value which is often higher than the value stated in the Balance Sheet. This cannot be compared unless price level changes are taken into account.
  • Window dressing: When the management decides to enter wrong figures to artificially inflate or deflate the financial results, then such income statements fail to provide a true and fair view of the financial position of the enterprise.

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