Limitations of Accounting Information (Cambridge (CIE) AS Accounting): Revision Note

The historic cost accounting principle means that the actual cost is recorded on the statements for each transaction

It can be difficult to compare transactions if they did not happen at the same time

There is a gap between the end of a financial year and the preparation of the financial statements

The current information might be different from the information stated on the financial statements

Ratios ignore the effects of inflation and the time value of money, which can affect the comparison between years

Businesses might have different layouts of their financial statements

• Some businesses might subtract the goods taken for the owner's use from purchases before stating it on the statement of profit or loss

• Some businesses might subtract sales returns from the sales before stating it on the statement of profit or loss

• Some businesses might not explicitly state the profit from operations, whereas others might

It can be difficult to make comparisons if the items do not represent exactly the same thing

The money measurement accounting principle means that only information involving money is recorded

There are a lot of other important aspects which are not included in the statements

• Quality of the goods

• Employee satisfaction

• Reputation

The businesses might be in different trades

• Comparisons should only be made between businesses within the same trade

• Inventory, expenses and profit margins are usually different for businesses in different trades

Errors in financial statements affect the ratios