Inherent Limitations in Accounting

Accounting information is not absolute. Considerable amounts of judgment and evaluation are required to develop the particular accounting measurements which are reported during a particular month, quarter, or year ( for e.g., how much pension expense should be reported now for the future profit that are being earned by employees now, but the amounts will not be known with assurance until many years to come?). About the only way around the trouble of utilizing estimation in accounting is to pass the time until all facts are known with certainty before issuing any reports. By the period any information could be reported, it would be so stale as to get rid of its usefulness. Thus, in order to timely present the information, it is regarded to be far better to embrace reasonable estimations in the normal preparation of in progress financial reports.In addition to this accounting has not yet superior to a state of being proficient to value a business (or a business's assets). As such, many of the transactions and events are reported based upon the historical cost principle (in contrast to fair value). This principle holds that it is enhanced to maintain accountability over certain financial statement elements at amounts that are objective and confirmable, rather than opening the door to casual adjustments for value changes that may not be acceptable. For example, land is initially recorded in the accounting files at its purchase price. That historical value will not be adjusted even if the fair value is apparent as increasing. While this improves the "consistency" of reported data, it can also pose a limitation on its "significance."

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