Limitations of Accounting

The following are the important limitations of accounting : 

• Due to Inflation :  As money is subject to responses to inflationary trends, the really truthful picture on the firm's financial health may be elusive unless adjusted appropriately for inflation. 
• Worthless Assets :  Caution must be taken in the matter of possible distortion of the factual position - whenever worthless (that is of no value to the firm) assets are included in the balance sheet - typically, preliminary expenses, commissions for underwriting, discounts on issues of shares and debentures. 
• Wanting in Accuracy :  Financial accounting information is based on assumptions, concepts, conventions, etc. These permit distortions in stating the factual position. 
• Window Dressing :  Entries in the Balance Sheet may occasionally be for camouflaging factual positions. With such window dressing, the true state of affairs of the business may not be fairly assessed. 
• Missing out on Non-monetary Transactions :  Non-monetary transactions are not included - e.g. good (or bad) labour relations, goodwill earned, working efficiency of staff, public esteem for the management, quality of goods, etc. These, in their own way, bear on the true worth of the business. 
• Realizable Worth is not Estimable :  In consequence of (a) to (e) and recognizing that provisions for depreciation would also affect in their own way, the realizable value of the assets (or of the whole business), when and if on sale, will not be estimated properly. 
• Personal bias in Judgement may Lead to Inexactness :  Though transaction? are recorded on actual basis, yet instances exist where estimates have to made for calculating profits. Examples are : determination of useful life of an asset, particularly machinery, for purposes of providing for depreciation; provision for doubtful debts; valuation of inventory (at lower of cost or market price). Individual biases will lead to differing estimates of profits by different persons,