Functions and Limitations of Accounting


Concept of Accounting

American Institute of Certified Public Accountants (AICPA) defines accounting as:

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least of financial character, and interpreting the results thereof.

Accounting is concerned with the recording of financial transactions, then classifying, and summarizing those transactions and communicate the financial information to users.

Functions of Accounting

  1. Systematic Records: The main function of accounting is to make systematic accounting records of financial transactions. Accounting follows the accounting principles and accounting standards to records financial transactions.
  2. Preparation of Financial Statements: Accounting prepares the Financial statement from the recorded transactions these transactions first recorded as the journal entry then trial balance and finally profit and loss account & balance sheet.
  3. Work as Legal Documents: Accounting records can be shown as legal evidence in the court. But for that, all the accounts must be prepared with following the accounting principles and accounting standards.
  4. Communicating the Financial Statement: After recording the other main function of accounting is to Communicating the Financial Statement to the users. Users of Accounting Information are Owner, Employee, creditors, Banks, Government, etc
  5. Provide data to Management: Accounting provides essential information to management So, that the manager can take proper decisions for the growth of there business.

Limitations of Accounting

  1. Accounting is not Fully Exact: Accounting recorded all the financial transactions with the historic value. Accounting does not consider the real value or market value of assets and liabilities.
  2. Accounting not shows the Realisable Value: The financial statement does not show the exact value of assets. It shows the historic value of assets and depreciation which we assumed but the market value may be different from the balance sheet.
  3. Accounting Ignores the Qualitative Element: Accounting recorded all the financial transaction which are in the monetary form. but do not consider emotion, staff, relations, and public relations.
  4. Accounting can be Manipulated: Manipulation of Accounts to Avoid tax and to show a better position to investors can be done. as making a few entries in the journal entry that change the real positions of the business.
  5. Accounting Ignore the Inflation Rate: Accounting ignores the inflation rates. For example, we have a debtor who has to pay us $100. But when he pays the amount after 5-6 months the value of that $100 may be decreased due to Inflation.
  6. Privacy of the firm: Privacy of the firm cannot be maintained as we need to show a financial statement to publicly.
  7. Personal Biasedness: Accounting can be biased for example as choosing the depreciation rate can be biased and may not be accurate.