Limitations of Accounting

Accounting is an indispensable tool, but a student should also be able to state its genuine limitations honestly.

• Records only monetary transactions — events that cannot be expressed in money terms (e.g. the efficiency of management, the loyalty of employees, a competitor launching a superior product) are not recorded at all, however important they may be to the business.
• Based on historical cost — assets are generally recorded at their original purchase price, which may differ considerably from their current market value, especially after several years.
• Involves personal judgement and estimates — figures such as the useful life of an asset (for depreciation) or the amount of a doubtful debt necessarily involve estimation, which introduces an element of subjectivity.
• Ignores qualitative factors — while accounting can tell us how much profit a business made, it says nothing directly about staff morale, brand reputation, or customer satisfaction, all of which affect the business's real worth.
• Possibility of window dressing — figures can, in principle, be manipulated or presented misleadingly to show a healthier position than actually exists, so accounting information should not be accepted uncritically. …