Limitations of Financial Accounting

Limitations of Financial Accounting

The main reason for the development of cost accounting is the limitations of financial accounting. Hence, causes for the development of cost accounting and limitations of financial accounting are one and the same.

The main causes for the development of cost accounting or Limitations of financial accounting are briefly explained below.

1. Financial Accounting gives the net result of the trading or manufacturing concern for a specific period. It does not provide the result in product wise or process wise or area wise or branch wise.

2. Financial accounting does not provide the data relating to the cost of goods manufactured. Hence, the company is not able to fix the reasonable price, price reduction during depression, formulating marketing policies etc.,

3. The conversion of a losing unit into a profitable one through cost control is possible with the help of financial accounting records.

4. Financial Accounting does not provide means for controlling different elements of cost, reduction of expenses, elimination of wastage, measurement of level of efficiency etc.,

5. The day-to-day income and expenses of a business concern are available from the financial records. Hence, the company is not able to control the cost.

6. Financial Accounting information is not useful for taking a decision relating to closing down a unit apparently making loss, introducing a new product or product-mix, entering into the foreign market etc.,

7. Financial Accounting fails to locate a place that is main spot of inefficiency in an organization. Moreover, there is no tool or scale of measurement for measuring the level of efficiency in operation.

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