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Limitations of Financial Statements

The limitations affecting financial statements are the following:

  • Historical cost: All the transactions are recorded at the historical value. i.e., the value prevailing at the time the transaction was entered into and all the subsequent changes are ignored.
  • Intangible strengths and weaknesses: The strengths and weaknesses of the firm cannot be shown in the Balance Sheet which is crucial for judging the financial position of the Company and hence, it should be kept in mind.
  • Perpetual continuity and periodical account: Financial statements are drawn up to the end of each year though the accounting record is maintained on the assumption that the business shall continue to exist forever. In consequence, much of the expenditure other than revenue expenditure has to be distributed arbitrarily over a number of years during which the benefit is expected to arise. Hence, financial statements of account are not absolutely correct.
  • Different accounting polices: The entities are permitted to use different accounting policies for preparation of accounts – valuation of various assets and distribution of expenditure over different periods of accounts. The financial statements of various Companies are not easily comparable.
  • Management polices: There is a general impression that each undertaking endeavours to earn as much profit as it can. This is not wholly correct. The management often attempts not to allow its profit to rise above a level that it considers appropriate.

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