Accounting Information Limitation

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LIMITATIONS OF ACCOUNTING INFORMATION

The contact groups of decision-makers have widely different information needs about an enterprise. It must be stressed that accounting is only one of a number of sources on information available to decision-makers though they are sometimes tempted to place more faith in accounting than excepted. Other sources are just as important if not more important than the information provided by the financial statements. It is therefore essential to highlight the limitations of the accounting information which in turn limit its usefulness.

(i) Accounting information is in terms of money.

Accounting provides information on events and transactions that are of financial nature or can be expressed in terms of monetary unit. It does not give information in quantity or size terms of in qualitative matters like usefulness or efficient. Non-monetary events or transactions are completely ignored however important these may be.

(ii) Accounting information is expressed in monetary terms and it is assumed that a monetary unit is stable overtime.

This is not true at all with the result that the impact of price level changes is not taken into consideration. The assets remain undervalued in many cases especially land and building. The direct outcome of this practice is that balance sheet figures of assets are not helpful in measuring the true financial positions of the enterprise.

(iii) Accountancy is as yet a inexact science and depends sometimes on a number of estimates, personal judgment etc.

Estimates are inherently inaccurate and personal judgments introduce bias in the accounting information. It is not possible to predict with any degree of accuracy the actual useful life of an asset which is done for calculating the depreciation charge. The same is true about provision for doubtful debts.

(iv) Accounting information cannot be used as only test of managerial performance.

The focus of the financial information is on profit or income which is only one small aspect of the annual story of business. Profits for a period of one year can readily be manipulated by suppressing such costs as advertisements, research and development, depreciation and so on.

(v) Accounting information is not neutral or unbiased.

Accountants measure income as conventionally defined: revenues less expenses. But accountants consider only selected revenues and expenses. They fail to give recognition to the benefits received by their efforts to clean up the environment, improve community welfare and introduce safety measures for the workers.

(vi) Accounting like other disciplines has to follow certain principles which in some cases are contradictory.

Current assets are valued on the basis of cost or market price whichever is less following the principle of conservatism. Accordingly the current assets may be valued on cost basis in some year and at market price in another year. In this manner, the rule of consistency is openly violated.

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