What are the Limitations of Financial Accounting?

Limitation of financial accounting

1. No clear idea of operating  efficiency : Financial accounting does not gives a clear picture of operating efficiency when prices are rising or decreasing on account of inflation or trade depression. It is possible that profits may be more or less not because of efficiency or  inefficiency but because  of inflation or trade depression .
2. Weakness not spotted out by collective result : Financial accounting discloses only the net result of the collective activities of a business as a whole .It does not indicate profit or loss of each department, job ,process or contract .It does not disclose the  exact  cause of inefficiency  i,e it does not  tell where the weakness is because it disclose the net profit of all the activities of a business as a whole.
3. Not help in the price fixation : In financial accounting cost are not available as an aid in determining prices of the products, services production order and line of product.
4. No classification of expense and account : In financial accounting there is no such system by which account are classified so as to give  data regarding cost by department , process, products in the manufacturing divisions  ;by units of product line and sale  territories  ; by department , services and functions in the administrative divisions . Further expense are  not classified as to direct and indirect items and are not assigned to the product at each stage of productions to show the controllable and uncontrollable items of overhead cost.
5. No data for comparison and decision making : It does not supply useful data to management for comparison with previous period and for taking various financial decisions as introduce of new product, replacement of labour by  machine , price in normal or special  circumstance , producing  a part inn the factory or buying it form outside market, production of a product to be continued or given up, priority  accorded to different product, investment to be made in new products or not etc.
6.  No control no  cost : It does not provide for a proper control of materials and supplies, wages, labour and overhead.
7. No standard to assess the performance : In financial accounting there is no well developed system of standards to appraise the efficiency of the organisation of the use of material, labour and overhead by comparing the work of labourers , clerk , salesman and executive which should have been accomplished in producing and selling a given number of product in an allotted period of time. It does not provide information to assess the performance of various person and department and to see that the cost do not exceed a reasonable limit for a given quantum of work of the requisite quality.
8. Provides only historical information : Financial accounting is mainly historical and tell about the cost already incurred .  It does not provide day to day cost information to  management for making effective plan for the coming year and the period after  that as financial data are  summarised  at the end of the  accounting period.
9. No analysis of losses :  It does not  provide complete analysis of losses due to defective material, idle time ,idle plant and equipment . In other words , no distinction is made between avoidable  and unavoidable wastage.
10. Inadequate information for report : It does not provide adequate information for report to outside agencies such as bank, government , insurance companies and trade associations.