Limitations of Accounting

What is Accounting?

The American Institute of Certified Public Accountants(AICPA) defines Accounting as the art of recording, classifying, and summarizing the transactions and events that are in monetary terms efficiently and effectively and interpreting the results....

Objectives of Accounting

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Advantages of Accounting

Provide Information about Financial Performance: The process of Accounting provides accurate and factual information regarding the financial performance of an organization during a given financial year. The organizational information includes profit earned, loss incurred, financial position, and other essential facts required by the different users of accounting information. Provide Assistance to Management: The process of accounting helps the management of an organization in effective business planning and decision-making for the attainment of organisational objectives. The management can do so with the help of the financial information provided by the accounting process. Helps in Raising Loans: For the survival, success, and growth of an organization, it needs finance. For this purpose, an organization can easily raise loans from different Financial Institutions and Banks based on the information provided by the accounting process in the form of financial statements and reports. Facilitates Comparative Study: As an organization prepares and maintains systematic financial records, it can effectively perform a comparative study. An organization can compare its current year’s performance with the previous year’s performance or with the performance of the competitors....

Limitations of Accounting

Accounting Information may be Unrealistic: As the records of an organization are maintained on the basis of accounting principles, conventions, and concepts, there is a possibility that the information provided by the organization may be unrealistic. Possibility of Window Dressing of the Financial Position: Organizations may present wrong and over-the-top information about their financial position by manipulating the books of accounts to attract people, investors, and different users. In these cases, the financial statements do not provide a true picture of the organization. Does not Consider the Qualitative Elements: The Accounting process only considers the monetary values or transactions and ignores the qualitative aspects of an organization. Accounting Records are not Fully Correct: An organization records its transactions in the books of accounts based on the sources like purchase invoices, sales invoices, cash receipts, bills, etc. If there is a mistake in any of these sources, the books of accounts will not show accurate information regarding the organization....

What is Accounting Information?

It is defined as the information provided by an organization in its financial statements for different internal and external users. An organization prepares the accounting information with the help of the Book-keeping process. The process helps the different users in understanding the financial position and profitability of the organization and make financial decisions accordingly....

Qualitative Characteristics of Accounting Information

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Users of Accounting Information

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