Limitations of Accounting.

main limitations of Accounting.

1. Accounting records only those transactions which can be measured in monetary terms.

2. Accounting transactions are recorded at cost in the books.The effect of price level changes is not brought into the books with the result that comparison of the various years becomes difficult. For example, the sale to total asset in 2009 would be much higher than in 2002 due to rising prices , fixed assets being shown at the cost and not at market price.

3. Accounting statements are prepared by following basic concepts and conventions. Therefore the accounting information may not be realistic.

4. Accountant may select any method of depreciation , valuation of stock, amortisation of fixed assets , treatment of deferred revenue expenditure. Therefore accounting statements are influenced by the personal judgement of the accountant.

Accounting Information Users

Users Of Accounting Information

The basic objective of accounting is to provide information which is useful for persons inside and outside the organisation.Accounting provides the information to the external and internal users which may base decisions that results in the allocation of economic resource in society.


External users of accounting information are those groups or persons who are outside the organisation for whom accounting function is performed.Internal users of accounting information are those persons or groups who are inside the organisation.

External Users of accounting information :

1. Investors : Those who want to invest money in an organisation want to know the financial health of the organisation. They need accounting information which will help them in evaluating past performance and future prospects of the organisation.

2. Creditors : Creditors means supplier of goods and services on credit , banks and lenders of money who want to know the financial position of a concern before providing loans or granting credit.They need accounting information relating to current assets , quick assets and current liabilities which is available in the financial statements.

3. Members Of Non Profit Organisations : Non profit organisations such as hospitals , clubs , schools, colleges etc. need accounting information to know how their contributed funds are being utilised. This information helps them to make decision regarding future support.

4. Government : Government wants to know earnings or sales for a particular period for the purpose of taxation. Income tax returns are examples of financial reports which are prepared with information taken from accounting.

5. Research Scholars : Accounting information helps research scholars who wants to make a study into the financial operation of a particular firm.

Internal Users Of Accounting Information

Internal users of accounting information are persons related to the organisation itself.

1. Owners : Business owners want to know whether their funds are being properly used or not. Accounting information helps them them to know the profitability and the financial position of the concern in which they have invested their funds.

2. Management: Accounting information is called the eyes and ears of management.It helps a manager in appraising the performance of the subordinates.

3. Employees : Employees of the organisation can get the actual information about the financial position of their organisation with the help of financial statements prepared by the accountant.

Accounting Classification

Accounting Classification

Accounting may be classified into :

1. Financial Accounting:

Financial accounting is maintained to record business transactions in the books of accounts so that operating results and financial condition for a particular period on a particular date can be known.

2. Cost Accounting:

The process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data is called cost accounting.

3. Management Accounting:
Management accounting is related to the use of accounting data collected with the help of financial and cost accounting for the purpose of policy formulation , planning , control and decision making by the management.

Accounting Functions

  Accounting Functions 

Accounting  performs two distinct functions.

1. Historical Function Of Accounting

Historical function of accounting relates to recording , classifying , summarising , analysing and interpreting past transactions. This functions reports at regular intervals to managers , owners and other parties by means of financial statements.

2. Managerial Function Of Accounting

Managerial function of accounting is helpful in planning future activities of the organisation and in controlling daily operations by comparing the actual results with pre-determined standards. This is done with a view to promoting maximum operational efficiency.

Objectives Of Accounting

Objectives Of Accounting

The main objective of accounting is to provide information about the financial condition of the organisation to internal and external users.

Other objectives of accounting are as follows.

1. Accounting helps on making decisions concerning more rational acquisition of limited resources through better decision choices.

2.Accounting helps for efficient use of available resource through prompt detection of inefficiencies.

3.Accounting helps for more equitable distribution of resources.

4.Accounting helps to make policy decisions relating to change in the system.

5. Accounting helps discharge of the social responsibilities of the business and industry.

6.Accounting Provides accounting data to the Government for taking decisions on excise duties, sales taxes etc.

Introduction to Accounting

Introduction toAccounting

Concept And Meaning Of Accounting

Accounting may be defined as the systematic recording , summarizing and analyzing of financial transactions and reporting the results.The main purpose of accounting is to show the exact financial condition of the business .Accounting helps to ascertain profit or loss during a specified period.It also helps to have control over the firms property.Therefore accounting is the art of recording and classifying business transactions and events in monetary terms.In the recent years accounting is defined as the art of communicating financial information about a business entity to external and internal users. External users of accounting information are investors , creditors , consumers , research scholars , government etc. Internal users of accounting information means owners, management and employees.