Limitations Of Financial Statements

Financial statements are useful sources of accounting information. Although they provide accounting information to the users (management, employee, investors etc.), these statements also suffer from some limitations. The major limitations of financial statements can be pointed out as follows:

1. Lack Of Quantitative Information 

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. So, lack of quantitative information is one of the main drawbacks of financial statements.

2. Based On Past Data

Financial statements record and reveal only the historical data in nature. They do not include any future possible results. So, they may not provide correct information to formulate future plans and policies.

3. Based On Principles

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. Summary Only

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. Cost Basis

Another limitation of financial Statements is that they 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. 

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 significance or importance of financial statements:

1. Provide Accurate Financial Data

Financial statements are the summary of information relating to profitability, and resources owned by the firm. These statements provides accurate and up to date financial data and information to the management and shareholders.

2. Easy Comparison

Financial statements provide the information which can be compared with those of other firms. It helps to understand the strength and weakness of the firm.

3. Useful For Employees

Financial statements show financial position, profitability and liquidity of the firm. Employees can use these statements to demand for increment in salary and other benefits.

4. Important For Obtaining Loan

Bankers and other financial institutional make the lending decision on the basis of financial condition of the firm.Therefore, financial statements are useful to obtain loan.

                     Also Read: Concept, Features And Objectives Of Financial Statements

5. Tax Purpose

Government bases on financial statements of the companies for the calculation of tax revenue from the firms. So, these statements are important for tax purpose also.

6. Assist Decision Making

Another importance of financial statements is that they can be used as the basis for management decision-making purpose like planning, promotion, research and development decisions etc.

7. Importance To Investors

Financial statements are important for existing investors to assess how efficiently the firm is using their funds.

8. Assist Investment Decisions

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

                     Also Read: Limitations Of Financial Statements

9. Historical Facts

Financial statements are prepared on the basis of historical data. So they reveal the history of the firm.

10. To Know The Liquidity And Solvency Position

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

Therefore, financial statements are important for the management, employees, investors, government, financial institutions and the public.

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.

                          Also Read: Importance Of Financial Statements
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.

                                Also Read: Limitations Of Financial Statements

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.

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, amortization of fixed assets , treatment of deferred revenue expenditure. Therefore accounting statements are influenced by the personal judgement of the accountant.

Internal Users Of Accounting Information

Accounting provides important data and information to both external and internal users.External users are the groups or persons outside the organization and internal users of accounting information are persons related to the organisation itself such as owners or shareholders, management and employees.

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. It also helps the management to make various financial decisions.

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.

External Users Of Accounting Information

Accounting provides the information which is useful for persons or groups inside or outside the organisation. Persons or groups outside the organization such as creditors, investors, government, research scholars etc.are known as external users.

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.

                     Also Read: Internal Users Of Accounting Information

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 utilized. 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.

                  Also Read: Users Of Accounting Information

5. Research Scholars 

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

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.

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:

Management 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.

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.

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.

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.