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Limitations of Final Accounts/Financial Statements

Financial statements are presented in the form of income statement and position statement. Income statement presents the performance of the business in terms of income earned by the firm. Position statement exhibits the value of assets and liabilities on a particulars date. Inspire of being very useful to the business financial statements suffer from the following limitation:

1. Ignores qualitative aspect. The notable weakness of financial statements is to present quantitative facts of the business in terms of money. Qualitative aspect however important are completely ignored. Administrative efficiency of the management and harmonious relations between management and labour are very significant factors in the success of the business but do not find a place in financial statements. 

2. Based upon convention and practices. Financial statements are prepared according to the practices adopted by individual firms. Different identical firms may adopt different methods of charging depreciation. Different methods of depreciation will depict different performance in the identical situations. Methods of valuating stock may also differ. Accounting is criticized for its convention of conservatism i.e., showing expected losses but ignoring expected income. Stock is valued at cost price or market price whichever is lower. In the same way, we do not show appreciation in the assets generally but we do not miss to show depreciation.

3. Ignores human resource. Human element is essential, active and sensitive factor of production. Physical factors, i.e., land, material, money, machines and equipments are meaningless without human factor. Financial statements do not accord any weightage to human reosurces.

4. Ignores price level changes. Change in the price affects cost of production, sales and value of assets. Changes in the price are quite obvious under inflation but financial statements ignore it. Changes are not incorporated in financial statements.

5. Ignores interest of all concerned parties. Financial statements are prepared taking into considerations proprietors interest. The Interest of other interested parties such as workers, investors, debenture holders, creditors, stock exchanges, economists and taxation authorities is ignored.

Preparation of Final Accounts (Financial Statements)

There are three following stages of preparing final accounts of a trading concern :

1. Trading account

2. Profit & Loss Account and

3. Balance Sheet.