Financial Accounting – Meaning And Limitations Of Financial Accounting

Meaning Of Accounting – Accounting is that system under which the transactions and events of business are recorded in monetary terms. Under it, accounting terms and concepts are used to describe the events that make up the existence of business. It records the business transactions taken place during the accounting period. At the end of the period, it shows the result of the transactions in the form of final accounts consisting of profit and loss account and balance sheet. For preparing these accounting includes identifying, recording, classifying, summarising and interpreting the results of the business transactions, so that, accurate decisions may be taken regarding business. Accounting is a means of communicating business information relevant to the objectives of the decision makers both internal and external.

Limitations Of Financial Accounting

(1) No Record of Non-monetary Transactions – Under accounting or financial accounting, only monetary transactions are recorded. These transactions should be measurable in monetary terms. Non-monetary items are not included under it i.e., accounting ignores the transactions and information of qualitative nature. The transactions which cannot be expressed in monetary terms, limit the scope of accounting.

(2) Effect of Personal Judgements – While accounting many decisions are taken for which there is no definite principle. Oftenly, accountants use their own personal experience for such decisions such as which will be the right method of depreciation, by which method stock will be evaluated and which method of interest on capital will be adopted. Besides this, the records aintained by accountants are also influenced by their likings and dislikings.

(3) Use of Historical Cost – In accounting, fixed assets are recorded on historical cost whereas, the value of assets keeps on fluctuating in the market due to which true and fair financial position is not ascertained by the balance sheet. Thus, due to historical nature of accounts, proper information cannot be made available to the related parties.

(4) Inaccurate and Incomplete Profit and Loss – To ascertain the current position of business, the knowledge of total profit and loss of each year is obtained. But it is incomplete. Besides this, there is lack of accuracy also because accurate profit and loss can be determined only after the winding- business. Thus, the annual profit and loss ascertained by accounting fils to provide the knowledge about the actual position of firm.

(5) Based on Unrealistic Facts – Oftenly, the amount of profit is shown less for concealing the right position of business or avoiding the tax. By doing so, public and other related parties remain uninformed about the right position of business. Thus, accounts prepared on the basis of unrealistic facts influence the decisions of different parties.

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