Accounting is an important part of any organization’s financial management. It is used to record, classify, and summarize financial transactions and events to prepare financial statements.
Despite its numerous advantages, the accounting system has some limitations.
In this article, we will discuss the top 6 limitations of accounting that organizations face.
Disadvantages or Limitations of Accounting
The following are the top 6 disadvantages or limitations of accounting:
Key Takeaways:
- Failure to use the double-entry accounting system can lead to accounting acceptability issues.
- Duplicate accounting creates fake accounts to evade taxes and present a false financial statement.
- Recording the purchasing power of money is difficult due to inflation or deflation.
- Replacing fixed assets can be a challenge because the saved depreciation may not be enough to cover the increased market value.
- Differences in the rules of different countries create challenges in accounting.
- Advance money adjustment problems can result in an incorrect picture in accounting.
1. Failure to use the double-entry accounting system:
The double-entry accounting system has long been regarded as a scientific and universal accounting system.
However, the double-entry accounting system is not yet fully implemented in many small business establishments in our country as well as in other countries around the world. As a result, accounting’s acceptability is dwindling by the day.
2. Duplicate Accounting:
Many organizations maintain two types of accounts, one for tax evasion and one for public display. To create a phony account, the organization frequently falsifies cash transactions, sales, debts, and so on.
3. Issue with recording the purchasing power of money:
As a result of inflation or deflation, the actual financial condition of the organization cannot be determined from the balance sheet’s various asset and debt clauses.
In other words, accounting in this case fails to measure the actual financial condition of the organization.
4. Problems in Replacing Fixed Assets:
According to the principles of accounting, depreciation has to be fixed at a fixed percentage on the past value of the assets.
At the end of the tenure of the asset, new assets are purchased with the money saved as depreciation.
But in practice, the amount of money needed to replace the property has not been saved as depreciation; Because the market value of the property has already increased. So in such a situation accounting is considered a failure.
5. Differences in the rules of different countries of the world:
Laws, regulations, types of professional standards, etc. are not the same in all countries of the world.
For example, the amount of income tax that is shown in the income tax law of one country, the same amount of income tax is not shown for the same amount of income in another country.
Different types of results are also obtained through accounting for such variations in regulations.
However, bringing similarity through such a combination of differences is a difficult task. Therefore, some seem to consider such variations as a failure of accounting.
6. Advance Money Adjustment Problems:
At the end of a financial accounting period, it is not possible for the organization to make a proper adjustment of all advance receipts or advance payments, as a result of which the correct picture does not emerge in accounting.
Despite the above difficulties, accounting has become a universally accepted means of accounting in all countries of the modern world.
However, we should all be more careful in applying the various rules of accounting.
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