Financial accounting and its limitations

Top 7 Limitations of Financial Accounting Article shared by: Financial accounting suffers from the following limitations which have been responsible for the emergence of cost and management accounting: Financial accounting does not provide detailed cost information for different departments, processes, products, jobs in the production divisions. Similarly, separate cost data are not available for different services and functions in the administration division.

Financial accounting and its limitations

Meaning, Objectives and Limitations Article shared by: Let us make in-depth study of the meaning, objectives and limitations of financial statement. Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organized manner.

We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts.

Financial accounting and its limitations

For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared. Trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in credit column.

To find out the profit earned or loss sustained by the firm during a given period of time and its financial position at a given point of time is one of the purposes of accounting.

For achieving this objective, financial statements are prepared by the business enterprise, which include income statement and positional statement.

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These two basic financial statements viz: The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time.

So, we can also say that the last step of the accounting cycle is the preparation of financial statements. It determines the profit earned or loss sustained by the business enterprise during a period of time. In large business organization, usually one account i.

Codification of Staff Accounting Bulletins - Topic 1: Financial Statements

On the other hand, in small size organizations, this account is divided into two parts i. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared.

Positional statement is another term used for Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by Balance Sheet.

Financial statements are required to ascertain whether the enterprise is earning adequate profit and to know whether the profits have increased or decreased as compared to the previous year sso that corrective steps can be taken well in advance.

What are the Limitations of Financial Accounting?

Financial statements help to analyse the position of the business as regards to the capacity of the entity to repay its short as well as long term liabilities. Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion as regard to growth of the business.

For example, increase in sales with simultaneous increase in the profits of the business, indicates a healthy sign for the growth of the business. Financial statements help the entity in determining solvency of the business and help to answer various aspects viz.

To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt sound business policy by making intra firm comparison. Financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these short comings.

Financial statements help the management to make forecast and prepare budgets. Financial statements are prepared by the entities to communicate with different parties about their financial position.

Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.

Limitations of Financial Statements: Some business enterprises resort to manipulate the information contained in the financial statements so as to cover up their bad or weak financial position.

Thus, the analysis based on such financial statements may be misleading due to window dressing. There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises.Introduction to Financial Ratios.

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After completing this course you will be conversant with: Financial Accounting A comprehensive and practical online guide for the basics of financial accounting. Financial accounting- financial accounting is an activity to prepare the financial statement of companies.

The financial statement of companies are show the financial position and performance of companies and and position to individuals outside the organization, Including financial specialists, investors, creditors, suppliers, and customers.

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