2.21. The accounting objectives to be considered while
designing an accounting system
i) Control over property and assets of the
firm: The accounting system should be designed in a way that up to
date information about various assets that the firm possesses is ready
available. Similarly, it should also provide up to date information relating to
the liabilities of the firm so that neither the assets of the organization get
misappropriated nor any rightful payment is withheld.
ii) Preparation of the financial statements of
accounts: The term final statement includes the income statement and
the balance sheet of the organization. These days, most of the business is
being carried on by the joint stock companies.
iii) Information to management for rational decision
making: We have seen that accounting is a service activity. Its
function is to provide information, primarily financial in nature, about
economic entities that are intended to be useful in making economic decisions
in making reasoned choices among alternatives courses of
action.19
2.22. The limitations of accounting
Accounting information is not free from bias
Some examples show this limitation; The inventory cost may be
ascertained by FIFO or LIFO methods or the stock can be valued at cost price or
market price. An other example is the depreciation of assets which can be
charged differently and give different results. Thus the lack of objectivity
may cause the income to not be true in some cases.
Provide only limited information
There are now no set patterns of business on account of radical
changes in business
activities. Expenditure may not bring an immediate
advantage to the business but it may
18 Accounting principles board(APB) statements
No.4, basic concepts and accounting principles underlying financial statements
of business enterprises, American institute of certified public accountants,
1870, p.40 5 Ibid, p. 76-84
19 S.N. Maheshwari, cost and management accounting,
eighth edition,1999, P.A.4-A.5
have to be incurred because it may bring advantage to the
business in the long run or may be necessary simply to sell the name of the
business. The management needs a lot of varied information to decide whether on
the whole it will be justifiable to incur a particular expenditure or not.
Financial accounting fails to provide such information.
Treats figures as single, simple and silent
items
Financial accounting fails to make people realize that
accounting figures are not mere isolated phenomena but they present a chain of
purposeful and pertinent events. The role an accountant these days is not only
of bookkeeper and auditor but also that of financial adviser. Recording of
transactions is now the secondary function of the accountant. His primary
function now is to analyze and interpret the results.
Provides only a post mortem record of business
transactions
It records transactions only on historical basis. These days'
business decisions are made on the basis of estimates and projections rather
than historical facts. Of course, past records are helpful in making future
projections but they alone are not sufficient. Thus needs of modern management
demand a break up from the principles and practice of traditional
accounting.
Considers only quantifiable information
Financial accounting considers only those facts that are
capable of being quantitatively expressed. In modern times, the concept of
welfare state has resulted in increased government interference in all sectors
of the national economy. The management has therefore to take into account
government decisions over and above purely commercial considerations. Some of
these factors are not capable of being quantitatively expressed and hence their
impact is not reflected in financial statements.
Fails to provide informational needs of different levels
of management
Company form of business organization has divorced ownership
from management. The shareholders are only the providers of capital. The
business is run in reality by different executives; search an expert in his
area. These executives have powers based on the level of management to which
they belong. There are usually three levels of management; Top, middle and
lower managements. The type of information required by each level of
management is different. Financial accounting does not have a
built in system to provide all such information.20
| 
