Limitations Of Financial Statements

The financial statements suffer from the following limitations:

1. Financial statements include the quantitative information which is expressed in monetary units. They do not provide any qualitative information which may have greater impact upon the decision makers.

2. Financial statements record and reveal only the historical data in nature. They do not include any future possible results.

3. Financial statements are strictly confined within the boundary of some accounting principles. They are used as the guidelines in recording and reporting the financial transactions.

4. Financial statements are just the summary reports of the company's financial transactions. All the detailed information regarding to such transactions cannot be disclosed in the financial statements.

5. Financial statements show the information on cost basis i.e. the price paid on the transaction's date. The effect of price level changes (inflation) is not shown in the financial statements. In other words, the information are not given in the current value.

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Importance Of Financial Statements

Financial statements are the important sources of information to all the users of accounting information like; management, owners, debtors, creditors, employees, government agencies, financial analysts, etc. The following are the points which highlight the importance of financial statements:

1. Financial statements are the summary of information relating to profitability, and resources owned by the firm.

2. Financial statements provide the information which can be compared with those of other firms.

3. Employees can use financial statements to demand for increment in salary and other benefits.

4. Bankers and other financial institutions can use financial statements to make the lending decisions.

5. Government bases on financial statements of the companies for the calculation of tax revenue from the firms.

6. Financial statements can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc.

7. Existing investors can use financial statements to assess how efficiently the firm is using their funds.

8. Potential investors can obtain information with the help of financial statements which can be useful to take investment decisions.

9. Financial statements reveal the history of the firm.

10. Financial statements can be used to assess the firm's liquidity and solvency position.

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Concept, Features And Objectives Of Financial Statements

Concept Of Financial Statements

Past events and performances serve as background for making projections if they are to be realistic.The financial statements provide important information concerning past financial transactions and their effects om the profitability and the financial position of the business. Various users of financial statements such as owners , investors , creditors , management etc. must make an analysis of financial statements to make right decision. Therefore financial statements are the means of conveying to owners , management or to interested outsiders a concise picture of profitability and financial position of the business. Financial statements are the end products of the accounting process which give a concise accounting information of the period after the accounting period is over.

Financial statements are the summary reports of a company's financial transactions. They report the end results of accounting activities during a given period of time. Financial statements provide the income or loss and financial position of a company. Financial statements are end of the period accounts prepared to show the profit or loss situation for a period of time and to assess the financial position and cash flow situation on a particular date. Financial statements report the result of past activities. Therefore, the are also called as the historical record of a company.

Financial Statements Include:

1. Income Statement

The income statement, sometimes called as the trading and profit and loss account or an earning statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as month or year by comparing the revenues generated with the expenses incurred to produce these revenues.

2. Statement Of Retained Earnings

The statement of retained earnings is also called as profit and loss appropriation account. One purpose of this statement is to connect the income statement and the balance sheet. The statement of retained earnings explains the changes in retained earnings between two balance sheet date. These changes usually consist of the addition of net income and the deduction of dividends.

3. Balance Sheet

The balance sheet, sometimes called statements of financial position, lists the company's assets, liabilities and stockholder's equity as on a particular date. A balance sheet is like a snap shot that captures the financial position of a company at a particular point of time.

4. Statement Of Cash Flows

Management is interested in the cash inflows to the company and the cash outflows from the company, because they determine the company's liquidity, its ability to pay its bills when due. The statement of cash flows shows the cash inflows and outflows from operating, investing and financing activities.

Features Of Financial Statements

The following are the features of financial statements:

1. Financial statements are always expressed in monetary terms. They ignore qualitative aspects. In other words, the non-monetary events do not come under the scope of financial statements.

2. Financial statements are always prepared for a certain period of time. They generally cover the period of one year.

3. Financial statements are historical in nature since they always present the past performance. Hence, they do not carry the futuristic approach.

Objectives Of Financial Statements

Financial statements of a company are the result of management's past actions and decisions. They are the end products of the accounting process. They give a picture of solvency and profitability of a company. The major objectives of the financial statements are as follows:

1. To provide the financial information to the internal and external users.

2. To provide the information, which are useful in the decision making process.

3. To reveal the profitability and solvency of the company.

4. To help to evaluate the financial position and efficiency of the management.

5. To show the financial health of the company.

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Limitations Of Accounting

The followings are the main limitations of Accounting.

1. Accounting records only those transactions which can be measured in monetary terms.

2. Accounting transactions are recorded at cost in the books.The effect of price level changes is not brought into the books with the result that comparison of the various years becomes difficult. For example, the sale to total asset in 2009 would be much higher than in 2002 due to rising prices , fixed assets being shown at the cost and not at market price.

3. Accounting statements are prepared by following basic concepts and conventions. Therefore the accounting information may not be realistic.

4. Accountant may select any method of depreciation , valuation of stock, amortisation of fixed assets , treatment of deferred revenue expenditure. Therefore accounting statements are influenced by the personal judgement of the accountant.

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Internal Users Of Accounting Information

Internal users of accounting information are persons related to the organisation itself.

1. Owners : Business owners want to know whether their funds are being properly used or not. Accounting information helps them them to know the profitability and the financial position of the concern in which they have invested their funds.

2. Management: Accounting information is called the eyes and ears of management.It helps a manager in appraising the performance of the subordinates.

3. Employees : Employees of the organisation can get the actual information about the financial position of their organisation with the help of financial statements prepared by the accountant.

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Users Of Accounting Information

The basic objective of accounting is to provide information which is useful for persons inside and outside the organisation.Accounting provides the information to the external and internal users which may base decisions that results in the allocation of economic resource in society.


External users of accounting information are those groups or persons who are outside the organisation for whom accounting function is performed.Internal users of accounting information are those persons or groups who are inside the organisation.

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External Users Of Accounting Information

Accounting provides the information which is useful for persons or groups inside or outside the organisation.

External Users of accounting information :

1. Investors : Those who want to invest money in an organisation want to know the financial health of the organisation. They need accounting information which will help them in evaluating past performance and future prospects of the organisation.

2. Creditors : Creditors means supplier of goods and services on credit , banks and lenders of money who want to know the financial position of a concern before providing loans or granting credit.They need accounting information relating to current assets , quick assets and current liabilities which is available in the financial statements.

3. Members Of Non Profit Organisations : Non profit organisations such as hospitals , clubs , schools, colleges etc. need accounting information to know how their contributed funds are being utilised. This information helps them to make decision regarding future support.

4. Government : Government wants to know earnings or sales for a particular period for the purpose of taxation. Income tax returns are examples of financial reports which are prepared with information taken from accounting.

5. Research Scholars : Accounting information helps research scholars who wants to make a study into the financial operation of a particular firm.

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Classification Of Accounting

Accounting may be classified into the following types.

1. Financial Accounting:

Financial accounting is maintained to record business transactions in the books of accounts so that operating results and financial condition for a particular period on a particular date can be known.

2. Cost Accounting:

The process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data is called cost accounting.

3. Management Accounting:

IManagement accounting is related to the use of accounting data collected with the help of financial and cost accounting for the purpose of policy formulation , planning , control and decision making by the management.

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Functions Of Accounting

Accounting has to perform two distinct functions.

1. Historical Function Of Accounting

Historical function of accounting relates to recording , classifying , summarising , analysing and interpreting past transactions. This functions reports at regular intervals to managers , owners and other parties by means of financial statements.

2. Managerial Function Of Accounting

Managerial function of accounting is helpful in planning future activities of the organisation and in controlling daily operations by comparing the actual results with pre-determined standards. This is done with a view to promoting maximum operational efficiency.

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Objectives Of Accounting

The main objective of accounting is to provide information about the financial condition of the organisation to internal and external users.

Other objectives of accounting are as follows.

1. Accounting helps on making decisions concerning more rational acquisition of limited resources through better decision choices.

2.Accounting helps for efficient use of available resource through prompt detection of inefficiencies.

3.Accounting helps for more equitable distribution of resources.

4.Accounting helps to make policy decisions relating to change in the system.

5. Accounting helps discharge of the social responsibilities of the business and industry.

6.Accounting Provides accounting data to the Government for taking decisions on excise duties, sales taxes etc.

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Introduction Of Accounting

Concept And Meaning Of Accounting

Accounting may be defined as the systematic recording , summarizing and analyzing of financial transactions and reporting the results.The main purpose of accounting is to show the exact financial condition of the business .Accounting helps to ascertain profit or loss during a specified period.It also helps to have control over the firms property.Therefore accounting is the art of recording and classifying business transactions and events in monetary terms.In the recent years accounting is defined as the art of communicating financial information about a business entity to external and internal users. External users of accounting information are investors , creditors , consumers , research scholars , government etc. Internal users of accounting information means owners, management and employees.

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