- Quantitative Attributes of Accounting<\/li>
- Qualitative Attributes of Accounting <\/li><\/ul>\n\n\n\n
QUALITATIVE ATTRIBUTES OF ACCOUNTING<\/strong><\/p>\n\n\n\n
The fundamental\nnature of financial statements is to provide true and fair view of the state of\naffairs and profit or loss for the period. Qualitative attributes simplifies\nand expands on the financial figures to ensure easy understanding and\ncomparability of results. The Qualitative Attributes that describe the Nature\nof Accounting are as follows:<\/p>\n\n\n\n
RELIABILITY<\/strong><\/p>\n\n\n\n
Reliability implies\nthat the information must be factual and verifiable. The accounting information\nhas said to have verifiability if such information can be verified from source\ndocuments such as cash memos, purchase invoices, sales invoices,\ncorrespondence, agreement, property deeds and other similar documents. <\/p>\n\n\n\n
In order to be relied\nupon, the financial information requires the following attributes:<\/p>\n\n\n\n
- Neutrality<\/li>
- Substance over form i.e. accounting\nshould be based on financial reality and not merely on legal form.<\/li>
- Prudence<\/li>
- Completeness<\/li><\/ul>\n\n\n\n
RELEVANCE<\/strong><\/p>\n\n\n\n
Accounting information depicted by financial statements must be relevant to the objectives of enterprise. Unnecessary and irrelevant information should not be included in financial statements. The INTERNATIONAL ACCOUNTING STANDADRDS BOARD (IASB) <\/strong>says that information is relevant \u201cWhen it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations.\u201d<\/p>\n\n\n\n
The relevance of\ninformation is affected by its nature and materiality. If an item or event is\nmaterial, it is probably relevant to the users of financial statements.<\/p>\n\n\n\n
For Example: The\ninformation regarding the rate of dividend paid by a company in previous years\nis relevant information for the investors since it provides a basis for\nforecasting future dividends.<\/p>\n\n\n\n
UNDERSTANDABILITY<\/strong><\/p>\n\n\n\n
Accounting\ninformation should be presented in such a simple and logical manner that they\nare understood easily by their users such as investors, lenders, employees etc.\nA person who does not have any knowledge of accounting terminology should also\nbe able to understand them without much difficulty.<\/p>\n\n\n\n
This can be done by\ngiving relevant explanatory notes to explain the information given in financial\nstatements. General topics which can be included in the explanatory notes are\nMethod of depreciation, method of valuation of inventory, description of\ncontingent liabilities, explanation of reserves, disclosure of events occurring\nafter balance sheet date etc, These explanatory notes make the financial\nstatements more useful and understandable.<\/p>\n\n\n\n
COMPARABILITY<\/strong><\/p>\n\n\n\n
Comparability is very\nuseful quality of the accounting. The financial statements should contain the\nfigures of previous year along with the figures of current year so that the\ncurrent performance can be compared with the past performance. Similarly, the\nfinancial statements should be prepared in such a way that the profitability\nand financial position of the concern may be compared with the other concerns\nof the similar type.<\/p>\n\n\n\n
Comparison reveals\nthe strong and weak points of the business entity. Comparison is possible when\nthe different firms in the same industry adopt the same accounting principles\nfrom year to year.<\/p>\n\n\n\n
For Example: If\ndiminishing balance method of charging depreciation is selected, it should not\nbe changed from year to year. Similarly, the method of valuation of stock\nshould also be consistently the same from year to year.<\/p>\n\n\n\n
FAITHFUL REPRESENTATION<\/strong><\/p>\n\n\n\n
Accounting aims at\npreparing those financial statements that depict the true and fair view of\nprofitability, liquidity and solvency position of an enterprise. Application of\nappropriate Accounting Standards normally results in financial statements\nportraying true and fair view of information of an enterprise.<\/p>\n\n\n\n
QUANTITATIVE ATTRIBUTES OF ACCOUNTING<\/strong><\/p>\n\n\n\n
The Quantitative\nattributes explaining Nature of Accounting are as follows:<\/p>\n\n\n\n
ACCOUNTING IS AN ART AS WELL AS SCIENCE<\/strong><\/p>\n\n\n\n
Accounting\nis an Art of recording, classifying, summarizing, analyzing and interpreting\nthe accounting records with a view to ascertain the net profit\/ loss and\nfinancial position of the business.<\/p>\n\n\n\n
Accounting\nas a Science is an organized body of knowledge that contains some underlying\nprinciples and rules that are followed while maintaining accounts. However,\nAccounting is not a pure science as it does not establish cause and effect\nrelationship.<\/p>\n\n\n\n
RECORDING OF FINANCIAL TRANSACTIONS ONLY<\/strong><\/p>\n\n\n\n
Accounting\nrecords only those transactions and events that are expressed in monetary terms\nor in quantitative form. For instance, the transactions like sale of goods for \u20b95,000\nwill be recorded in the books of accounts.<\/p>\n\n\n\n
However, there are so many events which\nare very important for business but cannot be recorded in the books of accounts\nbecause such events cannot be expressed in quantitative or monetary form. For\nexample: Loyalty of Employees, Resignation by an able and experienced manager,\nStrike by employees, Quarrel between employee and employer etc. but these\nevents have a large impact and direct bearing on the business of the firm.<\/p>\n\n\n\n
RECORDING IN TERMS OF MONEY<\/strong><\/p>\n\n\n\n
The accounting records only those\ntransactions which can be expressed in terms of money only. It implies that a\nbusiness man will not record the purchase of 5 chairs and 5 tables, he will\nrecord the purchase of 5 chairs costing \u20b92,500 and 5\ntables costing \u20b95,000.<\/p>\n\n\n\n
Also the recording is done in the book\nof the journal which is the primary book of recording the transactions in the\nchronological order.<\/p>\n\n\n\n
In small business houses, the recording\nof transactions is generally done in the book of Journal whereas in big\nbusiness houses the recording of transactions is done in the subsidiary books\nsuch as:<\/p>\n\n\n\n
- Cash Book<\/li>
- Purchase Book<\/li>
- Sales Book<\/li>
- Purchase Return Book<\/li>
- Sale Return Book<\/li>
- Bills Receivable Book<\/li>
- Bills Payable Book<\/li>
- Journal Proper<\/li><\/ul>\n\n\n\n
The number of subsidiary books to be\nmaintained depends upon the nature and size and needs or requirements of the\nbusiness.<\/p>\n\n\n\n
CLASSIFYING THE TRANSACTIONS<\/strong><\/p>\n\n\n\n
One of the Features of Accounting<\/a> is that it classifies all the transactions recorded in the book of the Journal. Classification refers to grouping the transactions of same nature at one place, in a separate account. Classification of transactions is done in the books of \u2018Ledger\u2019. All the accounts related to creditors, debtors, capital, assets, liabilities, incomes and expenses are separately opened in the Ledger Book. Example: Wages Account, Ram Account, Advertisement Account, Cash Account, Bank Overdraft Account etc.<\/p>\n\n\n\n
SUMMARISING THE TRANSACTIONS<\/strong><\/p>\n\n\n\n
Summarizing is the art of presenting\nthe classified data in a manner which is understandable and useful to\nmanagement and other users of such data. It involves:<\/p>\n\n\n\n
- Balancing of Ledger Accounts<\/li>
- Preparation of Trial Balance<\/li>
- Preparation of Trading and Profit &\nLoss A\/c<\/li>
- Preparation of Balance Sheet<\/li><\/ul>\n\n\n\n
Trial Balance is a summary of all the\nledger accounts and is maintained to check the arithmetical accuracy of\naccounts. Trading Account is prepared to find out the Gross Profit or Gross\nLoss while Profit & Loss Account helps in knowing Net Profit or Net Loss.\nBalance Sheet prepared at the end of accounting year helps in knowing the\nfinancial position of the concern. It shows the Profitability, Solvency as well\nas Liquidity position of the business.<\/p>\n\n\n\n
ANALYSING<\/strong><\/p>\n\n\n\n
Analyzing is concerned with the\nestablishment of relationship between the various items or groups of items\ntaken from Income Statement or Balance Sheet or both. Purpose of analysis is to\nidentify he financial strengths and weaknesses of the enterprise. It provides\nthe base for analysis.<\/p>\n\n\n\n
INTERPRETATION OF RESULTS<\/strong><\/p>\n\n\n\n
Another feature of accounting is\ninterpretation of results. Interpretation of results is concerned with\nexplaining the meaning and significance of the relationship so established by\nthe analysis. Interpretation of results requires high degree of knowledge and\nskills. The accountant should answer:<\/p>\n\n\n\n
- What has happened?<\/li>
- Why is happened?<\/li>
- What is likely to happen under\nspecified conditions? <\/li><\/ul>\n\n\n\n
COMMUNICATING THE RESULTS<\/strong><\/p>\n\n\n\n
Accounting is so featured that it will provide the analyzed and interpreted results to its users such as Management, Employees, Creditors, Research Scholars, Debtors, Financial Institutions, Competitors, Bankers, Income Tax Authorities etc. The results are communicated by preparing final accounts, ratios, graphs, diagrams, charts, fund flow statement, cash flow statement etc. <\/p>\n\n\n\n
SCOPE OF ACCOUNTING<\/h4>\n\n\n\n
The scope of accounting<\/a> is wide and extends in business, trade, government, financial institutions, individuals and families and every other avenues.<\/p>\n\n\n\n
ACCORDING TO RJ BULL<\/strong><\/p>\n\n\n\n
The scope is as follows:<\/p>\n\n\n\n
![\"NATURE](\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/07\/Slide1-10.jpg\")
NATURE AND SCOPE OF FINANCIAL ACCOUNTING<\/figcaption><\/figure>\n\n\n\n The above diagram makes it clear that accounting data is\nprepared and processed by using various methods of accounts. In a later stage,\nthe report is prepared to evaluate accounting data. The report is prepared for\nexternal and internal users.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN PERSONAL LIFE<\/strong><\/p>\n\n\n\n
The financial transactions which occur in the individual\nlife of a person are recorded properly in the books of accounts with a view to\nascertain receipts, payments and liabilities.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN BUSINESS ORGANISATION<\/strong><\/p>\n\n\n\n
The accounting is rightly called \u2018Language of Business\u2019. The\nprime objective of business is to earn profits. Financial transactions of a business\nconcern are recorded in the books of accounts to ascertain operating results\nand financial position.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN NON-TRADING OR NON-PROFIT ORGANISATIONS<\/strong><\/p>\n\n\n\n
Accounting has its place in non- profit organisations also.\nThe non- profit organisations make the record of all the donations received,\nsubscription given by members and all the expenditure. For this purpose Receipt\nand Payment Account, Income and Expenditure Account and Balance Sheet are\nprepared. All the accounts are prepared as per the rule of Accounting.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN GOVERNMENT ORGANISATIONS OFFICES<\/strong><\/p>\n\n\n\n
The system of accounts is prevalent in government offices, courts\nand state owned organisations to determine income, expenditure and proper\nrunning of administration. In the preparation of national planning and budget,\naccounting information is needed and reason for national progress and regress\ncan be known through interpretation and evaluation of accounting data.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING FOR PROFESSIONALS<\/strong><\/p>\n\n\n\n
Professionals like doctors, engineers, advocates\/ lawyers,\nactors and actresses also maintain their accounts. They maintain their accounts\nto keep a check on their income and expenditure and also the income tax\nliability is determined from the same.<\/p>\n\n\n\n
CONCLUSION<\/h4>\n\n\n\n
From the above discussion, it is very much clear that the field of accounts are very wide and it spreads in every walk of social life. Trade and commerce are rapidly changing and developing with the changes of everything in this dynamic world. The application of accounting has achieved anew shape with the development of technology. The advancement of accounting is continuing with the multifarious development of science and technology, factory and industry and trade and commerce. <\/p>\n\n\n\n\n\n\n\n
NATURE AND SCOPE OF FINANCIAL ACCOUNTING<\/h2>\n\n\n\n
QUESTION: What is Financial Accounting? What are its objects?<\/strong><\/h3>\n\n\n\n
Financial Accounting is a system which involves the identification of transactions and events which are financial in nature; ensuring measurement of transactions in the monetary terms; recording the transactions in the journal; classifying the entries in ledger, summarizing the entries in final accounts i.e. Trading Account and Profit and Loss Account and Balance Sheet; analyzing and interpreting the results and communicating the results to the users of the accounting information.<\/p>\n\n\n\n
ACCORDING TO APB (Accounting Principles Board)<\/strong><\/p>\n\n\n\n
\u201cAccounting\nis a service activity. Its function is to provide quantitative information,\nprimarily financial in nature, about economic entities that is intended to be\nuseful in making economic decisions.\u201d<\/p>\n\n\n\n
The Objectives Of Accounting are as follows:<\/p>\n\n\n\n
KEEPING SYSTEMATIC RECORDS OF BUSINESS TRANSACTIONS<\/strong><\/p>\n\n\n\n
This is one of the main Objectives of Accounting ie. to keep the systematic records of Accounting Transactions. This is so because human memory is limited. It is impossible to memorize all the transactions of the business. That is why transactions are recorded in the books of accounts i.e. Journal, Subsidiary Books, Ledger etc. as per the rules of double entry system. Also the accounts are closed each year and Trading and Profit and Loss Account and Balance Sheet is prepared. Complete records prepared helps in avoiding any kind of fraud, misappropriation and omission.<\/p>\n\n\n\n
PROTECTION OF BUSINESS PROPERTIES<\/strong><\/p>\n\n\n\n
Accounting aims at\nproviding protection to the business properties from unauthorized, unjustified\nand unwarranted use as it provides the following information to the\naccountants:<\/p>\n\n\n\n
- How much capital is invested in the\nbusiness by the proprietor?<\/li>
- How much the business has to pay to\nothers?<\/li>
- How much the business has to recover\nfrom others?<\/li>
- How much the business has in the form\nof Fixed Assets, Cash in hand, Cash at bank, Stock of raw materials,\nwork-in-progress and finished goods?<\/li><\/ul>\n\n\n\n
The information about\nthese matters helps the proprietor in assuring that the funds of the business\nare not necessarily kept idle or under-utilized.<\/p>\n\n\n\n
TO ASCERTAIN OPERATIONAL PROFIT OR LOSS<\/strong><\/p>\n\n\n\n
One of the objectives\nof Accounting is to ascertain the true profit or loss of the firm at the end of\nthe financial year. For this purpose, the Trading and Profit & Loss Account\nis prepared. The preparation of Trading Account helps in knowing about:<\/p>\n\n\n\n
- How much goods are there in the stock?<\/li>
- How much goods are sold or remain\nunsold?<\/li>
- To what extent the firm is incurring\non the direct expenses?<\/li>
- What is the Gross Profit or Gross Loss\nfor the year?<\/li><\/ul>\n\n\n\n
Similarly,\npreparation of Profit and Loss Account gives information about:<\/p>\n\n\n\n
- How much the firm is spending by way\nof Advertisement, Insurance, Trading Expenses, Electricity, Stationery etc.?<\/li>
- How much firm is earning through\ncommissions, discount, interest etc.?<\/li><\/ul>\n\n\n\n
If the indirect\nexpenses are more than the indirect incomes, there is net loss to the firm. And\nif the indirect incomes are more than the indirect expenses, there is net\nprofit to the firm.<\/p>\n\n\n\n
Profit and Loss\nAccount, thus, will help the management, investors, creditors etc. in knowing\nwhether running of the business has proved to be remunerative or not. In case,\nit has not proved to be remunerative or profitable, the cause of such a state\nof affairs is investigated and necessary remedial steps are taken.<\/p>\n\n\n\n
ASCERTAIN FINANCIAL POSITION OF BUSINESS<\/strong><\/p>\n\n\n\n
To know about the\nprofit and loss of the firm is not enough. A businessman must also know about\nthe financial position of his firm. He must know where he stands, what he owes\nand what he owns? For this purpose, Balance Sheet or Position Statement is prepared\nat the end of the year. <\/p>\n\n\n\n
Balance Sheet is a\nstatement that shows the capital, assets and liabilities of the firm. From\nthis, the owner can easily take a view of the following information:<\/p>\n\n\n\n
- How much the business has to recover\nfrom others i.e. Debtors?<\/li>
- How much the business has to pay to\nothers i.e. Creditors?<\/li>
- What is the amount of capital invested\nin the business?<\/li>
- What constitutes the assets of the\nfirm?<\/li><\/ul>\n\n\n\n
All this is helpful\nto provide the clear view of Profitability, Liquidity and Solvency position of\nthe firm.<\/p>\n\n\n\n
TO FACILITATE RATIONAL DECISION MAKING<\/strong><\/p>\n\n\n\n
Accounting is related\nto identification, collection, recording, classifying, summarizing, analyzing,\ninterpreting and communicating the accounting information. The information is\nreported to the required levels of management at required points of time to\nfacilitate rational decision making.<\/p>\n\n\n\n
AAA (American Accounting Association)<\/strong> has also stressed on this point:<\/p>\n\n\n\n
\u201cAccounting\nis the process of identifying, measuring and communicating economic information\nto permit informed judgments and decisions by the users of information.\u201d <\/p>\n\n\n\n
To\ntake the best decisions is not an easy task. But still all efforts are taken by\nthe management to improve the decision making process.<\/p>\n\n\n\n
PROVIDE INFORMATION TO VARIOUS PARTIES<\/strong><\/p>\n\n\n\n
Another\nmain objective of accounting is to communicate the accounting information t\nvarious interested parties like owners, investors, creditors, banks, employees,\nresearch scholars and government authorities\u2019 etc. the information helps them\nin taking sound and judicious decisions about the business entity.<\/p>\n\n\n\n
OTHER OBJECTIVES<\/strong><\/p>\n\n\n\n
Apart from the above mentioned objectives, there are also some other Objectives of Accounting, which are as follows:<\/p>\n\n\n\n
- To know the exact reasons leading to net profit or loss.<\/li>
- To ascertain the progress of the business from year to year.<\/li>
- Prevention and Detection of errors and frauds.<\/li><\/ul>\n\n\n\n\n\n\n\n
NATURE AND SCOPE OF FINANCIAL ACCOUNTING<\/h2>\n\n\n\n
QUESTION: Explain meaning of Financial Accounting? Discuss its scope and limitations?<\/strong><\/h3>\n\n\n\n
Financial Accounting is a system which involves the identification of transactions and events which are financial in nature; ensuring measurement of transactions in the monetary terms; recording the transactions in the journal; classifying the entries in ledger, summarizing the entries in final accounts i.e. Trading Account and Profit and Loss Account and Balance Sheet; analyzing and interpreting the results and communicating the results to the users of the accounting information.ACCORDING TO APB (Accounting Principles Board)<\/strong> <\/span>\u201cAccounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.\u201d<\/p><\/p>\n\n\n\n
SCOPE OF ACCOUNTING<\/h4>\n\n\n\n
The scope of accounting<\/a> is wide and extends in business, trade, government, financial institutions, individuals and families and every other avenues.<\/p>\n\n\n\n
ACCORDING TO RJ BULL<\/strong><\/p>\n\n\n\n
The scope is as follows:<\/p>\n\n\n\n
NATURE AND SCOPE OF FINANCIAL ACCOUNTING<\/figcaption><\/figure>\n\n\n\n The above diagram makes it clear that accounting data is\nprepared and processed by using various methods of accounts. In a later stage,\nthe report is prepared to evaluate accounting data. The report is prepared for\nexternal and internal users.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN PERSONAL LIFE<\/strong><\/p>\n\n\n\n
The financial transactions which occur in the individual\nlife of a person are recorded properly in the books of accounts with a view to\nascertain receipts, payments and liabilities.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN BUSINESS ORGANISATION<\/strong><\/p>\n\n\n\n
The accounting is rightly called \u2018Language of Business\u2019. The\nprime objective of business is to earn profits. Financial transactions of a business\nconcern are recorded in the books of accounts to ascertain operating results\nand financial position.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN NON-TRADING OR NON-PROFIT ORGANISATIONS<\/strong><\/p>\n\n\n\n
Accounting has its place in non- profit organisations also.\nThe non- profit organisations make the record of all the donations received,\nsubscription given by members and all the expenditure. For this purpose Receipt\nand Payment Account, Income and Expenditure Account and Balance Sheet are\nprepared. All the accounts are prepared as per the rule of Accounting.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING IN GOVERNMENT ORGANISATIONS OFFICES<\/strong><\/p>\n\n\n\n
The system of accounts is prevalent in government offices, courts\nand state owned organisations to determine income, expenditure and proper\nrunning of administration. In the preparation of national planning and budget,\naccounting information is needed and reason for national progress and regress\ncan be known through interpretation and evaluation of accounting data.<\/p>\n\n\n\n
SCOPE OF ACCOUNTING FOR PROFESSIONALS<\/strong><\/p>\n\n\n\n
Professionals like doctors, engineers, advocates\/ lawyers, actors and actresses also maintain their accounts. They maintain their accounts to keep a check on their income and expenditure and also the income tax liability is determined from the same.<\/p>\n\n\n\n
LIMITATIONS OF ACCOUNTING<\/h4>\n\n\n\n
Accounting<\/a> is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. But it suffers from drawbacks which hinders its utility<\/a>. The Limitations of Accounting are as follows:<\/p>\n\n\n\n
INFLUENCED BY PERSONAL JUDGMENTS<\/strong><\/p>\n\n\n\n
Accounting\nis viewed as Science but it is not an exact science and accountant has to\nexercise some personal judgments in respect of various items. Accountant has to\nmake varied estimates and appropriations regarding various items like<\/p>\n\n\n\n
- Rate of Depreciation <\/li>
- Method of Charging Depreciation on assets<\/li>
- Rate of Provision for Doubtful Debts<\/li>
- Amount of provision for Discount on Debtors<\/li>
- Methods of valuation of Stock, etc.<\/li><\/ul>\n\n\n\n
Such\nestimations are charged against profit and loss account and thus do not give an\nauthenticated view of final accounts.<\/p>\n\n\n\n
PERMIT ALTERNATIVE TREATMENTS<\/strong><\/p>\n\n\n\n
Accounting\nfollows various concepts and conventions which provides the alternative\ntreatment for the items. One transaction can be treated in two or many ways\nwhich makes the results incomparable. For instance: Going Concern Concept\nstates that asset should be recorded at its cost, but at the time of sale of\nassets it is valued at market price, so this leads to wrong estimations about\nthe sale price of asset.<\/p>\n\n\n\n
Similarly, Conservatism Convention states that \u201cAnticipate no profits but provide for all losses\u201d<\/em><\/strong>. As per this future losses are provided for in the present but the future income is ignored.<\/p>\n\n\n\n
Also\nthere are different methods for valuation of stock like LIFO (Last In First\nOut), FIFO (First In First Out), Average Stock method etc. and no guidelines\nare there to chose which method at most.<\/p>\n\n\n\n
INCOMPLETE INFORMATION<\/strong><\/p>\n\n\n\n
Accounting\nstatements provide the periodic information which is incomplete as the accounts\nare maintained as per accounting period concept. However, actual profit or loss\ncan be ascertained only when the business closes down. So the information we\nget belong to a financial year only not of the whole tenure of the firm.<\/p>\n\n\n\n
IGNORES QUALITATIVE INFORMATION<\/strong><\/p>\n\n\n\n
Accounting\nrecords only those transactions and events which are financial in nature and\ncan be expressed in the terms of money, but in real world, there is also some\nqualitative information which is of utmost importance, but is ignored by the\nAccounting. The qualitative aspects like change in management, loyalty and\nhonesty of employees, hard work of management, good industrial relations etc\nare totally omitted from the accounting records.<\/p>\n\n\n\n
For\nExample: The conflicts among the management and the employees make the firm run\ninto losses but such information is not recorded in the books of accounts. <\/p>\n\n\n\n
BASED ON HISTORICAL COSTS<\/strong><\/p>\n\n\n\n
Accounting is done on\nthe basis of historical costs and the figures shown by the financial statements\nprepared do not show the price level changes. Also the assets are recorded at\nthe cost price not at the market value and thus remain under-valued or over-\nvalued. All this makes the balance sheet unauthenticated and the financial\nposition cannot be estimated truly. In this way, it does not depict the true\npresent value of the business.<\/p>\n\n\n\n
DOES NOT PROVIDE TIMELY INFORMATION<\/strong><\/p>\n\n\n\n
Accounting provides\nthe information by preparing the final accounts which include Trading Account\nand Profit and Loss Account and Balance Sheet which are prepared at the end of\nthe accounting year. So the management gets the information at the end of the\nfinancial year which is just a \u2018post-mortem\u2019 analysis of the recorded\ntransactions. However the management requires the information at frequent\nintervals to plan the best about the upcoming course of action and this purpose\nis not well catered by the accounting records.<\/p>\n\n\n\n
For example: If the\nbusiness has set a target that it will earn the revenue of \u20b912,00,000\nin the year, then it requires information whether the earnings in a month is\n\u20b91,00,000 or less or more. Traditionally the accounting will not provide such\ninformation at frequent intervals.<\/p>\n\n\n\n
AFFECTED BY WINDOW DRESSEING<\/strong><\/p>\n\n\n\n
Window dressing refers\nto the practice of manipulating the accounts, so that financial statements may\ndisclose a more favorable position than the actual position.<\/p>\n\n\n\n
For example: The\npurchases made at the end of the year may not be recorded or the closing stock\nmay be over-valued. Hence, correct decisions cannot be taken on the basis of\nsuch financial information.<\/p>\n\n\n\n
UNSUITABLE FOR FORECASTING<\/strong><\/p>\n\n\n\n
Financial Accounts are\nonly a record of past events. Continuous changes take place in the demand of\nthe product, policies adopted by the firm, the position of competition etc. As\nsuch, the financial analysis based on the past events may not be of much use\nfor forecasting.<\/p>\n\n\n\n
DOES NOT PROVIDE DETAILED ANALYSIS <\/strong><\/p>\n\n\n\n
The Accounting provides\nthe details about the aggregates not the individual items. The Trading Account,\nProfit and Loss Account and Balance Sheet are just the summaries of the\ntransactions which do not provide the detailed analysis of any transaction or\nevent. So, only overall results of the firm can be studies with the help of the\naccounting information.<\/p>\n\n\n\n
For example: If business has earned a total profit of \u20b95,00,000 during the accounting year and it sells three products namely tea, sugar and bread and wants to know the profit earned by each product separately, accounting will not serve this motive. <\/p>\n\n\n\n