Freely Falling Currencies
The freely floating currency system may have its advantages and disadvantages. However, it has fundamentally changed the way we look at currencies. In doing so, it has created one major obstacle. We now compare currencies with one another to check if they have gained or lost value. This way of measurement is bizarre to say […]
Rising Interest Rates: The Perfect Storm for The Silicon Valley Bank
Bank failures are complex events that are the result of many underlying factors. When the history of any bank failure is traced, one can see that the trouble is usually present for a long period of time before the culmination takes place and the failure of the bank’s system becomes public knowledge. Hence, one can […]
How Do Funds Transfer Systems Work
Domestic Funds Transfer It is common for individuals and entities to transfer funds to their friends, family, business partners, and associates. The way funds transfer works is opaque to the individual as he or she simply instructs the banks (or enables funds transfer when using online banking) and waits for confirmation from the other end […]
4 Driving Factors for Sustainable Corporate Banking
Commercial or corporate banking has undergone a sea of change in the recent past. All these changes have not been related to technology. Some of the changes have also been related to ideology. The rise of the concept of sustainable corporate banking signifies an ideological shift in the commercial banking industry. Earlier, corporate banking was […]
Process of Financial Planning
The financial goal of most people is to become wealthy. This is the reason why a lot of people are seen chasing their dreams of higher income. This is because, in their mind, a higher income correlates with being wealthy. A lot of the time, it negatively affects their health and happiness also. The normal […]
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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