Alternatives to overcome limitations of financial accounting

Meaning, Limitations and Scope Article shared by: In this article we will discuss about Management Accounting: Meaning of Management Accounting 2.

Alternatives to overcome limitations of financial accounting

The tendency for secret reserves. Importance of form over substance. These limitations are stated below; 1.

The nine limitations of accounting are;

Recording only monetary items As per accounting principlesonly the events measurable in terms of money are recorded in the books of accounts. But events of great importance if not measurable in terms of money is not accounted for. For that reason, recorded accounting information fails to exhibit the exact financial position of a business concern.

Time Value of Money Under the accounting system money value is treated constantly. But the value of money always changes due to inflation.

Under existing accounting systems accounts are maintained considering historical cost ignoring current changed value.

As a result, the accounts maintained fail to exhibit the exact financial position of a business concern. Recommendation of alternative methods There exists an application of alternative methods in determining depreciation of assets and valuation of stock etc.

Alternatives to overcome limitations of financial accounting

Information regarding the activities of business is expressed in a misleading way if an alternative method is used to achieve a particular object. Restrain of Accounting Principles Exhibited accounting information cannot always exhibit a true and fair picture of a business concern owing to limitations of accounting principles used.

For example, Fixed assets are shown after deducting depreciation. In case of inflation, the value of fixed assets shown in the accounts does not correspond to the real position. Recording of past events Accounting past events are accounted for. But naturally, there is no system of recording events that may occur in future.

Allocation of problem The allocation process is an important problem in the accounting system. The value of fixed assets is exhausted charging depreciation for the allocated period. Useful life of fixed assets is fixed up hypothetically which does not stand accurately in most cases.

Maintaining secrecy Secrecy cannot be ensured for the involvement of many employees in accounting work although maintaining secrecy is very important. The tendency for secret reserves Often management creates secret reserves intentionally by increasing or decreasing assets and liabilities for which total financial picture of an organization is not reflected.

Importance of form over substance At the time of preparing accounts for a particular period emphasis is laid on form, table etc. As per Company Act, preparation of balance sheet in the prescribed form is mandatory.

Although there are some limitations in the present accounting system, accounting in the present day world has generally been accepted as a recognized profession. Efforts are on throughout the world to overcome these limitations.

Economic activities of any society without accounting are neither possible nor legal.Financial accounting is the only branch of accounting and it is not prefect.

There are large numbers of limitations which open new way to use other tools of accounting. There are large numbers of limitations which open new way to use other tools of accounting.

CFA Level 1 - Uses and Limitations of Financial Ratios. Discusses the limitations of financial ratio analysis.

Learn how benchmarking . ADVERTISEMENTS: Financial accounting suffers from the following limitations which have been responsible for the emergence of cost and management accounting: 1. Financial accounting does not provide detailed cost information for different departments, processes, products, jobs in .

Despite accounting’s huge advantages, there are limitations of accounting that every accountant, businessmen, student must be aware of. In the modem age in all spheres of the society, the importance and necessity of Accounting are felt deeply. Aug 29,  · Whether the problem is saving, debt, or investing, we all have financial challenges to face in reaching our financial goals.

The most important thing is to not let them limit you. Following are the limitations. Financial accounting permits alternative treatmentsAccounting isbased on concepts and it follows " generally accepted principles"but there ex ist more than one.

Alternatives to overcome the limitation of financial accounting