Limitations of Accounting

Limitations of Accounting

Limitations of accounting can be explained in terms of misleading results, mistake & fraud detection, management biased, and high cost.

1.    Misleading Results

First limitation of accounting is its misleading result, if not handle appropriately. Accounting is based on certain rules, and wrong application of those rules may produce misleading results.

2.    Mistakes Detection Failure

Second limitation of accounting is its inability to detect all mistakes. Accounting system can detect only that mistake which has single effect. Accounting system cannot detect wrong application of principles, or counter balancing transaction.

3.    Management Biased

Third limitation of accounting system is management biased in selection of policies and interpretation thereof. Accounting system is not independent and in many circumstance, it requires management interpretation, for example in making estimate. Therefore accounting is not independent information system.

4.    Frauds Detection Failure

Frauds are not detected by accounting system automatically; however accounting may provide some indications of fraud. For example accounting system provides information for comparison the result of two periods and fluctuation in results without any explanation may be an indication of fraud.

5.    Cost & time

Fifth limitation of accounting is its high cost. Business need to hire a competent manager and good accounting software (now days). Therefore accounting system is not feasible option for many small businesses.