Monetary statements prepared under historic accounting system suffer from a number of limitations, that happen to be as follows:
1 . No Concern Of Cost Level Alterations
Financial assertions prepared under historical expense accounting are merely statement of historical information. Changes in the benefit of money resulting from changes in standard level of cost are not considered. Hence, they fail to give true and fair picture of the situation of the corporation.
2 . Impractical Fixed Property Values
In historical price accounting, fixed assets happen to be recorded and presented at the price where they are obtained. Changes in the their market value of this sort of assets happen to be ignored.
several. Insufficient Supply For Downgrading
Downgrading is a mechanism of generating funds to replace the fixed property when the replacement unit becomes due. In historical cost accounting, depreciation can be charged on such basis as historical cost of fixed property, not with the price from which the same assets are obtained. The supply made by technique of depreciation fee on the original cost will not be sufficient for the replacement of assets.
5. Unrealistic Revenue
Income declaration prepared underneath historical price accounting does not reveal the case profit. Income are recorded on current worth basis although expenses happen to be recorded by historical price. Profits happen to be over-stated throughout inflation.
5. Mixing From Holding And Operating Gain
In historical cost accounting, gain or perhaps loss due to holding inventories may be mixed up with operating gain or losses. Holding gain or losses ought to be segregated by operating gain or loss to determine the accurate operating overall performance.
6. Fails To Present A reasonable Value Of Financial Position
Balance sheet consists of budgetary and nonmonetary items. Budgetary items like funds, loan, borrowers, creditors and so forth are demonstrated at their particular current funds value. Non-monetary items like inventory, building, terrain etc . will be shown by historical being, not by current...