Financial accounting is the process of recording, summarizing and reporting the myriad of transactions resulting from business operations over a period of time.
The following are limitation associated with financial accounting:
- Financial accounting is historical in nature. Financial accounting present financial statement at the end of the period which normally covers the year in length and fails to provide day to day information for an entity. These financial statements present an account of the past performance of the entity and therefore financial statements can offer limited insight into future prospects of an entity
- Lack of details; Financial accounting aggregate financial transactions that occurred during the course of the period i.e income, expenses, assets, liability and equity. It does not provide adequate breakdown of these important aspects to help management in dealing with the business of running the an entity.
- Lack o information on efficiency. financial statements does not provide information as regards to how efficient an entity is in relation to usage of labor, materials, overhead costs etc.
- No classification of expenses; expenses are not classified as either direct or indirect or fixed or variable or controllable or uncontrollable.
- Planning and control. Financial accounting does not provide strong guidance to management for proper planning , control and decision making in an entity.
- Financial accounting ignores important non monetary information. Financial accounting does not generally consider those transactions that are non monetary in nature and therefore important aspect of business such as employees loyalty, extent of competition faced by the entity, technical innovation owned by an entity etc. are not reflected by using financial accounting;
- Financial accounting deals with overall profitability. accounting for business are made by the way which shows only overall profitability. it does not show net profit per product , or per department or according to job.