Real Reasons behind FDI in Retail in India
A couple of years ago India as a country, was facing a huge divide. The government of India had passed a new legislation which would allow foreign direct investment into the retail sector. This meant that global economic giants like Wal-Mart, Tesco and Sears were on their way to open up stores in India. Needless […]
Valuation of Sports Franchises: Discount Rate Calculation
In the previous article, we have already seen how the valuation of a sporting franchise can be found using the income approach. This approach relies extensively on finding out the cash flow that is likely to accrue to the sporting franchise and then discounting it at a predetermined discount rate in order to find out […]
The NSE Co-Location Fraud
The National Stock Exchange (NSE) is one of the two leading stock exchanges in India. Ironically, the National Stock Exchange was created as a result of a huge scam which happened in the Bombay Stock Exchange (BSE). The regulators were of the opinion that the broker nexus in the BSE was too strong. Hence, in […]
The Need for Derivatives
In the previous article, we discussed as to how derivatives contracts can be dangerous and can pose a systemic risk. Then the question arises as to why are derivates needed at all? If they are dangerous financial instruments, that can pose a risk to the safety of the entire financial universe, then why is it […]
Infrastructure as an Asset Class
As asset class is a group of assets that have similar investment characteristics amongst themselves. At the same time, their investment characteristics are different from other asset classes. For instance, all stocks share certain characteristics amongst themselves, which they do not share with bonds. Similarly, there are certain characteristics that infrastructure also has as an […]
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.
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An Overview of Contracts and Why They are Important to Business and Society
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