Accounting is a system of keeping track of economic transactions. There are two main types of accounting: financial accounting and management accounting. Financial accounting deals with the recording, reporting, and analysis of financial activities across the whole organization. Management accounting deals with information for internal decision making including budgets, product pricing, and investments.
Accounting has been around in some form since ancient civilizations started trading or conducting business transactions involving money. This would have required people to keep records of these transactions to prevent theft or deception from taking place. In modern society, there are three groups that benefit from having accurate financial information: investors, creditors, and government agencies.
For these three groups, accurate financial statements allow them to make good decisions about whether or not they should invest in a company, whether or not they should lend money to the company, and whether the government should tax or regulate that industry.
Limitations of Accounting
Accounting is a way to evaluate and report on business activity. Accounting information identifies the strengths of an entity, as well as any limitations. The primary limitation of accounting is that it generally only provides useful information for entities that are generating revenue. This means that non-profit organizations and government agencies can face both financial loss and gain and be largely unaware due to this fact.
The various concepts and conventions on which the principles
of accounting are based to a large extent are responsible for the limitations
listed below:
- Only transactions which can be measured in terms of money can be recorded in the account books. So events however important they may be to the business do not find a place in the accounts if they can't be measured in terms of money.
- According to the cost concept, assets are recorded at the cost at which they are acquired and, therefore, accounts ignore the changes in values of assets brought about by changing value of money and market factors. Therefore, for an outsider who wishes to evaluate the business, the balance sheet is least helpful if it is not supplemented by other information.
- The monetary record is to a great extent the consequence of an individual judgment of the bookkeeper with respect to the selection of bookkeeping approaches.