Financial Accounting has its Limitations

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Published: 12th January 2010
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If one takes a deeper look into the different aspects of accounting, one will find that it is not free from limitations. Financial accounting gives room for alternative treatment. Basically, accountancy is based on the 'generally accepted principles', but one will see that there is more than one principle when it comes to the documentation of a single item. The entities permit alternative treatments for different purposes. But it has to fall within the framework of 'generally accepted principles' that have gained acceptance. One of the flaws of financial accounting is that it does not provide timely information. But, this cannot be considered a limitation at all, since highly useful software applications of the likes of Myob are used to produce online and concurrent accounts and the balance sheets can be made available almost immediately. Manual accounting has got a problem or shortcoming with this. The information provided by financial accounting personnel is, at best, one that has got some historical interest only. What takes place is only the post-mortem analysis of the details. In fact, all businesses require access to timely information made possible at frequent intervals. Then, the management of a company will be in a better position to plan and take corrective actions.



As everyone knows, financial accounting cannot be expected to supply information at short notice. With the introduction of computerized accounting and customised soft ware, financial accounting is made easy. It generates monthly profit & loss accounts and balance sheets, and has overcome the limitations that existed earlier. There is some influence of personal judgment happening in financial accounting domain. This so-called 'Convention of objectivity' is acceptable and assumes some respect in the accounting area. This is due to the fact that personal judgment is required in order to record certain events and making estimates. It is well nigh impossible to maintain accuracy in future estimates and as a result objectivity suffers. For instance, if one wants to determine the amount of depreciation that has to be charged every year the estimation done cannot be counted authoritative, but just an approximation.



Financial accounting pays no attention to non-monetary information; transactions that are non- monetary in nature. Take a few examples, the intangible things like the extent of competition faced by the company, loyalty levels and efficiency of the employees etc. are some of the important matters which are of interest to the top management. But, accounting does not take note of such matters. Thus the end user of these kinds of financial information is, in effect, deprived of some crucial information that are of a non-monetary character. But, in today's world, good accounting software or packages with MIS and CRM will be found to be useful in overcoming this limitation, but only partly. Financial accounting, in fact, does not supply one with detailed reports of analyses. But, there is no denying the fact that it enables one to study the overall result. The important information regarding the revenue, cost and profit of each product is not got by simply relying on financial accounting.





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