LIMITATIONS OF FINANCIAL ACCOUNTING

1. Simply transactions which can be calculated in terms of money can be recorded in the books of accounts. Actions, though important they may be to the business, do not locate a place in the accounts if they cannot be calculated in terms of money.

2. According to the cost idea, assets are recorded at the cost at which they are acquired and so ignore the changes in values of assets brought about by changing value of money and market factors.

3. There is disagreement between one accounting principle and another. For instance, current resources are valued on the foundation of cost or market price either is less according to the principle of conservatism. So, in one year cost basis may be taken, while in another year market price may be taken. This standard contravenes the principle of consistency4. The balance sheet is basically the result of the personal judgment of the accountant with regard to the acceptance of accounting policies and as such objectivity factor is lost.

5. Financial accounting can be understood just by persons who have accounting knowledge.

6. Inter firm comparison and relative study of two periods are not promising under this system, as necessary past information cannot be made obtainable.

7. Financial accounting does not point to the cost behavior, so cost control cannot be adopted.