Why Should Central Banks Be Independent?
Last month Donald Trump fueled a debate when he called the Fed “crazy.” Political accusations started flying all across the media. However, it raised a very important point. The world realized that Donald Trump is not in control of the Federal Reserve which is the central bank of the United States. To the financially savvy, […]
Major Currency Pairs in Forex Market
The Importance of Major Pairs The Forex market is a place where trading happens in all currencies. However, the volume of trade that is conducted in different currencies is very different. Hence, even though there are hundreds of currencies in the world, about two thirds of the massive $4 trillion dollar Forex volume is transacted […]
Third-Party Risks in an Infrastructure Project
In the previous few articles, we have come across the various types of risk which are present in an infrastructure project. We have discussed the risk of cost overruns as well as the risks of revenue delays and everything in between. However, all the risks we discussed were directly applicable to the infrastructure company or […]
Equity Valuation: Definition, Importance and Process
Throughout finance, one rule always holds true. The general belief is that the value of any asset or security is exactly equal to the discounted present value of all the cash flows that can be derived from it in future periods. Using this principle, one can easily value securities like debt. This is because they […]
Can Cost Cutting Turn Out to be Expensive?
Downturns are part of an economic cycle. Every few years or so, the economy stops growing at a rapid speed. At first, the growth rate decelerates, then stagnates, and finally,, when negative growth appears, a recession officially kicks in. It is no mystery that generating revenues during recessions can be quite difficult. This is the […]
Although accounting may be heralded as being the language of the business, it is definitely not error-free. This has been highlighted by the fact that accounting scams have occurred one after the other for many years. In fact, even after stricter regulation and tightening of accounting rules, accounting scams just don’t cease to stop.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major limitations of accounting.
Accountants have to attach a monetary value to every event or transaction that has taken place within the organization. Sometimes the monetary value of the transaction is impossible to be ascertained. Consider the case of depreciation. Accountants can at best provide estimates of the depreciation that should have taken place given the scale of operations. However, these estimates are usually way off the mark. This makes accounting policies open to debate as well as manipulation.
Accountants try to attach a monetary value to everything. The things they cannot attach a monetary value to are not accounted for! Consider the case of Goodwill. Until the organization has explicitly paid for the Goodwill it purchased from another company, it cannot account for Goodwill. According to accountants, the Goodwill generated by the firm internally is worthless. We all know that this is not the case and therefore accounting is flawed as far as Goodwill is concerned.
Accountants have to measure all transactions in a single unit of account. This unit of account is usually the currency that is being used in a particular country. However, it is common knowledge that the value of currencies is not stable.
Inflation, deflation and such other forces make currency values dynamic. When accountants express assets purchased in last year’s rupees with the same unit as purchased by this year’s rupees, it presents a distorted image. Many companies have low book values because their assets were purchased a long time back during periods of no inflation.
Accountants provide information about what has happened. However, management would be better off if they had information about what could have happened if they used their resources in the optimum manner. This feature is also lacking in accountancy making its usefulness limited from the managerial point of view.
Despite its limitations, the importance of accounting is unquestionable. It is difficult to imagine running a firm without accounting.
Your email address will not be published. Required fields are marked *
An Overview of Contracts and Why They are Important to Business and Society
February 12, 2025
