Limitations of Final Accounts or Financial Statements

There are three important aspects of preparing final accounts namely:

  • Trading accounts
  • Profit and Loss accounts
  • Balance sheet

A company’s final accounts will help to recognize the current status of that business. Preparing income and position statement after the end of a certain time period will show income that is earned through business performance, good or bad and the values of assets and liabilities depending on that particular period. This is definitely a useful process of any active firm but the limitations it possesses are not to be ignored so easily:

  • Dependent upon the initial price: When preparing a balance sheet, a firm tends to record all transactions with its price in the ledger. But the fact is through time those prices will definitely change. In these situations, where some specific item will be recorded with their renewed price tag, such as marketable securities, but fixed assets do not receive any new entry. This is surely a hindrance when trying to measure through final accounts.
  • Not a single mention upon intangible assets: Sometimes business needs to build their brand image and often change some methods of publicity to improve business strategies. These are to create better business possibilities in the near future. These are counted as intangible assets that are definitely important for gaining net profit. But there is no special mention of this and charged against expense directly.
  • Not compared among different companies: The final accounts cannot be compared with various other companies. The accounting method applied to create this financial statement is different from each other. This is rather a huge layback. Not just the process of depreciation but also the ways to evaluate stocks are different.
  • Ignoring certain productive factors: Not just buying and selling, a productive business grows with the help of human labors and their working abilities. This huge factor is ignored in any type of final statements. There are other necessary matters like the interest of concerned parties or importance of non-financial issues like environmental concerns are also largely ignored in this statement.


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