Series B Funding
In the previous articles, we have already learned about the seed funding stage as well as the series A funding stage. We know that entrepreneurs raise seed funding in order to be able to build the prototype of the product. After the prototype is in place, they raise Series A funding to build the actual […]
Advantages of Using Cryptocurrency
The popularity of cryptocurrency has exploded over the past few years. Statistics clearly suggest that cryptocurrencies are one of the most widely traded financial assets today. This is obviously because of the fact that there are some advantages to using cryptocurrency. In this article, we will have a closer look at those advantages and try […]
Pre-IPO Investing
An initial public offer (IPO) is a method of selling securities wherein the entire lot of securities is offered for sale to the general public. An IPO is often used by companies when they want to sell their securities to smaller investment organizations and even retail investors. In the past few years, IPOs have seen […]
What is Bank Guarantee? – Different Types of Guarantees
The scope of trade has been widely expanded in the modern world. There are many kinds of organizations, private and public which trade with each other. A lot of the time, trades happen between big and small organizations and sometimes these trades happen when both parties are present in different countries. In such cases, there […]
Interest Coverage Ratio – Meaning, Assumptions and Interpretation
The interest coverage ratio is a number that has a lot of importance for the creditors of the firm. This number tells them how safe their investments are and how likely they are to get back principal and interest on time. Formula Interest Coverage Ratio = EBIT / Interest Meaning The interest coverage ratio tells […]
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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