FUNCTIONS AND LIMITATIONS OF ACCOUNTING.
FUNCTIONS AND LIMITATIONS OF ACCOUNTING.
Category
📚
LearningTranscript
00:00Hello guys, hope everyone is doing great, this is Sonia Setia, your accounts and eco
00:12tutor, again I am here in front of you with part number 3 of chapter 1, class 11th accounts
00:22right, so 2 parts we have seen already, number 1 was meaning and features of accounting and
00:32number 2 we have covered objectives of accounting right, today we are moving ahead with our
00:41part number 3, that is functions of accounting, so if you have any issue, any doubt then you
00:52can write to me in the comment section, definitely I will try to reply your queries, so let's
01:01start then, functions of accounting and limitations of accounting, so hope screen is visible to
01:12all of you, so this is part number 3, again repeating, again I am repeating, part number
01:223, class 11, financial accounting, chapter number 1, the name of the chapter is introduction
01:33to accounting, so we are starting with the functions of accounting, so what can be functions
01:39of accounting, in functions of accounting, you have to tell that what is the main work
01:47what is the motive, what is the role of accounting, what work should be done by accounting, what
01:54functions should be done by accounting, so we are going to do this, just give me a second,
02:01I am opening slide number 1, give me a second, yeah, so again I am telling that I have made
02:16shortcuts for all of you, so that you can memorize the points, the headings or to keep
02:26it in your mind, so first we have, point number 1, we have maintaining systematic accounting
02:36records, but before that let's see a shortcut, MP, MCA, means our MP, member of parliament
02:44which you call, suppose this we are taking, just taking an example, that our MP is MCA,
02:53means he has done degree in master of computer application, so MP, MCA, so in this what is
03:01going to be, first what we have to do is, we have to maintain systematic accounting records,
03:10the first important function of accounting is, what will be the function of accounting,
03:15we will make systematic accounting records, right, if we make systematic accounting records
03:22through accounting, then what will happen, we will be able to make our financial statements
03:29properly, right, so second point will be preparation of financial statements, right, so if we make
03:38systematic accounting records, financial statements, so what will happen after that,
03:45after that we will be able to meet our legal requirements, if we have done these two steps,
03:52that we have maintained accounting records properly, and through that we have made financial
03:59statements, in financial statements as you know, trial balance comes, income statement
04:05comes, balance sheet comes, so we have made this also, right, so after that in which thing
04:12this is going to help us, right, so you will be able to meet your legal requirements, point
04:18no. 3 will be, meeting legal, meeting legal requirements from M, first will be maintaining
04:26systematic accounting records from M, second will be preparation of financial statements,
04:34and what will happen from third M, meeting the legal requirements, now with our accounting
04:41records, we will be able to meet our legal requirements, what are legal requirements,
04:47like income tax department is there, GST department is there, it will do your tax calculations,
04:54company's, how much profit you have earned in business, and how much profit you have
05:01saved by investing in business, according to that, your calculation is done of whose,
05:07income tax, GST, goods and services tax, so accordingly we have also met our legal requirements,
05:14now what is C, from C we have to communicate this information to our users, right, so this
05:26C is for communicating the financial information to the users of accounting, so users, we have
05:33done it properly, so what all comes in users, external users also come, internal users also
05:41come, right, so what all are there in external, in external like banks are there, your money
05:49vendors are there, your suppliers are there, and researchers are there, your taxation authorities
05:58are there, and in internal what all we have done that management comes, employees come,
06:04owner comes, so what are all these, your internal users who have management, who need information
06:13so that they can quickly respond to situations, can do their forecasting, and can do timely
06:22decision making, right, so we have also done this step that we have to communicate, from
06:29C, communicating the financial information to the users, right, what is last A, from last
06:36A what do you have, assistance to the management, right, so we have, management also needs this
06:43information, it assists so that they can take their decisions, can do future planning, can
06:50do budgeting, and can do improvements, can do their SWOT analysis, right, so this information
07:01will assist, so again, let us understand this once, that what all points are being made from
07:09this, so from M, maintaining systematic accounting records, from P, preparation of financial
07:16statements, from M, meeting legal requirements, and from C, communicating this accounting
07:24information to the users, and from A, what is this, assistance to the management, hope
07:30is clear to everyone, right, so we are moving towards point number 1, maintaining systematic
07:38records, systematic accounting records, so what we are going to see in this, the primary
07:43function of accounting is to maintain systematic accounting records of financial transactions
07:51following the accounting rules, principles, and concepts, so what we have to do, what
07:58is the primary function of accounting, primary means the main function, what is the main
08:03function of accounting, that we have to make systematic accounting records, how will you
08:08make systematic, first you need the bills, receipts, vouchers, everything, on the basis
08:16of which, on the basis of evidence, you will record those transactions in your business,
08:23you will journalize, you will do journal entries, right, and after that what are you going to
08:29make, after that you will make different separate accounts for the ledger posting from those
08:35journal entries, in which we did classification, right, ledger accounts, you are going to classify,
08:42right, after that what we did, after that you have to make trial balance also, which
08:47will come in your financial statements, so on the basis of bills, on the basis of some
08:53evidence, you are going to record these financial nature transactions in your books of account,
09:02so for that you have to, certain rules which are mentioned in accounting, certain principles
09:08are mentioned, which is going to come in the next chapter, that what do they say, what
09:15are the financial rules and regulations, does every company start doing accounting as per
09:22its own will, that any method will be used, will do anything, no, that is not the right
09:27way, every company has to do accounting according to the rules of accounting, so those principles,
09:37those concepts we have to follow, so that we can make the accounting records, so what
09:44does accounting do, what does a first function perform, that it makes accounting records,
09:51following or by adopting certain accounting rules and regulations, principles and concepts,
09:59so it's clear, right, so we have done the first point, now we will move towards the
10:08second point, yeah, here we go, so second point we have, preparation of financial statements,
10:20now we had seen that what we are going to do in the second point, we are going to make
10:25financial statements, the next function of accounting is to prepare financial statements
10:32or final accounts at the end of the accounting period to determine the profit earned or loss
10:39incurred, see till here, what is the next function of accounting, that we have to make financial
10:45statements, that you call final accounts or financial statements as you are comfortable,
10:51and what is this, at the end of the accounting period, what is the end of the accounting
10:57period, your financial year starts from 1st April and ends on 31st March of next year,
11:09so on 31st March, your final accounts should be ready, right, so in this what you make,
11:16mainly you make income statement and balance sheet, you will make income statement from
11:23which you will get to know whether the firm earned profit or incurred loss, right, so
11:31what it is saying, determine the profit earned or loss incurred and the company's financial
11:36position, from where you get to know about the company's financial position or financial
11:40health, you get to know from the balance sheet, so you call it as financial position statement
11:48also, so this includes an income statement and the balance sheet, both statements are
11:55important for all the users to make the decision, so both these statements say that it is very
12:03important, on the basis of which the users, we have made users, in which the main investors
12:11also come, so the investors decide whether they want to invest in your company or not,
12:20so on what basis they decide, they will keep your income statement in front, right, and
12:27now they will keep your balance sheet in front, from which they will decide, by checking
12:32everything, whether they should invest in your company or not, so who does this, who
12:38is responsible for making these financial statements, we make these financial statements
12:43in accounting, right, so hope you understood it properly, and we are moving towards point
12:52number 3, right, yes, so point number 3, we have meeting the legal requirements, we just
13:01discussed that, we don't make it like this, no company makes financial statements like
13:08this, they have to make it for everything, you have to see the owner, you have to see
13:14the management, you have to see the employees, you have to publish it publicly also, you
13:19have to publish it publicly also, you have to publish it publicly also, you have to publish
13:23it publicly also, you have to publish it publicly also, you have to publish it publicly also,
13:26you have to publish it publicly also, you have to publish it publicly also, you have to publish
13:28it publicly also, you have to publish it publicly also, you have to publish it publicly also,
13:30you have to publish it publicly also, you have to publish it publicly also, you have to publish
13:31it publicly also, you have to publish it publicly also, you have to publish it publicly also,
13:32you have to publish it publicly also, you have to publish it publicly also, you have to
13:33publish it publicly also, you have to publish it publicly also, you have to publish it
13:34publicly also, you have to publish it publicly also, you have to publish it publicly also,
13:35you have to publish it publicly also, you have to publish it publicly also, you have to
13:36publish it publicly also, you have to publish it publicly also, you have to publish it publicly
14:01also, you have to publish it publicly also, you have to publish it publicly also, you
14:07have to publish it publicly also, you have to publish it publicly also, you have to publish
14:08it publicly also, you have to publish it publicly also, you have to publish it publicly also,
14:09you have to publish it publicly also, you have to publish it publicly also, you have to publish
14:10it publicly also, you have to publish it publicly also, you have to publish it publicly also,
14:11you have to publish it publicly also, you have to publish it publicly also, you have to publish
14:12it publicly also, you have to publish it publicly also, you have to publish it publicly also,
14:13you have to publish it publicly also, you have to publish it publicly also, you have to
14:14publish it publicly also, you have to publish it publicly also, you have to publish it publicly
14:15also, you have to publish it publicly also, you have to publish it publicly also, you have
14:16to publish it publicly also, you have to publish it publicly also, you have to publish it publicly
14:40also, you have to publish it publicly also, you have to publish it publicly also, you
14:47have to publish it publicly also, you have to publish it publicly also, you have to publish
14:52it publicly also, you have to publish it publicly also, you have to publish it publicly also,
14:53you have to publish it publicly also, you have to publish it publicly also, you have
14:54to publish it publicly also, you have to publish it publicly also, you have to publish it publicly
14:55also, you have to publish it publicly also, you have to publish it publicly also, you
14:56have to publish it publicly also, you have to publish it publicly also, you have to publish
14:57it publicly also, you have to publish it publicly also, you have to publish it publicly also,
14:58you have to publish it publicly also, you have to publish it publicly also, you have to
14:59publish it publicly also, you have to publish it publicly also, you have to publish it
15:00publicly also, you have to publish it publicly also, you have to publish it publicly also,
15:01you have to publish it publicly also, you have to publish it publicly also, you have
15:02to publish it publicly also, you have to publish it publicly also, you have to publish it publicly
15:03also, you have to publish it publicly also, you have to publish it publicly also, you
15:04have to publish it publicly also, you have to publish it publicly also, you have to publish
15:05it publicly also, you have to publish it publicly also, you have to publish it publicly also,
15:06you have to publish it publicly also, you have to publish it publicly also, you have
15:07to publish it publicly also, you have to publish it publicly also, you have to publish it
15:08publicly also, you have to publish it publicly also, you have to publish it publicly also,
15:09you have to publish it publicly also, you have to publish it publicly also, you have
15:10to publish it publicly also, you have to publish it publicly also, you have to publish it publicly
15:25also, you have to publish it publicly also, you have to publish it publicly also, you
15:33have to publish it publicly also, you have to publish it publicly also, you have to publish
15:42it publicly also, you have to publish it publicly also, you have to publish it publicly also,
15:48you have to publish it publicly also, you have to publish it publicly also, you have to publish
15:54it publicly also, you have to publish it publicly also, you have to publish it publicly also,
15:59you have to publish it publicly also, you have to publish it publicly also, you have
16:04to publish it publicly also, you have to publish it publicly also, you have to publish it publicly
16:09also, you have to publish it publicly also, you have to publish it publicly also, you
16:12have to publish it publicly also, you have to publish it publicly also, you have to publish
16:15it publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:18you have to publish it publicly also, you have to publish it publicly also, you have to publish
16:21it publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:23you have to publish it publicly also, you have to publish it publicly also, you have to
16:25publish it publicly also, you have to publish it publicly also, you have to publish it
16:27publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:29you have to publish it publicly also, you have to publish it publicly also, you have to publish
16:30it publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:31you have to publish it publicly also, you have to publish it publicly also, you have to publish
16:32it publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:33you have to publish it publicly also, you have to publish it publicly also, you have
16:34to publish it publicly also, you have to publish it publicly also, you have to publish it
16:35publicly also, you have to publish it publicly also, you have to publish it publicly also,
16:36you have to publish it publicly also, you have to publish it publicly also, you have
16:37to publish it publicly also, you have to publish it publicly also, you have to publish
16:38it publicly also, you have to publish it publicly also, you have to publish it publicly also,
17:04Number 5 is the last point of functions of accounting that is assistance to the management.
17:15Management often requires the financial information which is given by the accounting department
17:25in form of accounting reports.
17:27Management is one thing and accounting department is another.
17:37This information will be given to the management because they have to do decision making, planning and budgeting so that they can get better results.
17:55Accounting department will deliver the information to the management timely so that the management can do their decision making timely.
18:07In form of accounting reports, it helps the management in decision making.
18:13It also helps the management in protecting and controlling the assets.
18:17Accounting department will also inform the management about the assets, liabilities, repairs, depreciation and when to replace the assets.
18:30So that if the management has the information, they can protect and control their assets.
18:44So that the management will have all the information about the assets, plant and machinery, land and building, equipment, computers, vehicles, stock, debtors, goodwill.
19:02So that the management will be able to control all the information.
19:09Hope it's also clear.
19:12So these were the functions of accounting.
19:15So now we are moving to the limitations of accounting.
19:23What are the limitations?
19:26Limitations of accounting are that there are two sides to everything.
19:32Like a coin has two sides.
19:36Similarly, if we have some good functions of accounting, the other side is unfavorable.
19:50There are some demerits and limitations.
19:55So we have to cover them.
19:59So we have covered the good things of accounting.
20:03Now we are going to cover the drawbacks and limitations of accounting.
20:09We have also made a shortcut for this.
20:12U4 times A
20:17U4 times A
20:19We will cover the U point first.
20:24We will cover the A point later.
20:27So what is your U?
20:29U is your unrealistic information.
20:33Accounting also gives you unrealistic information.
20:37And what is your second A?
20:39Accounting is not fully exact.
20:43And what is the second A?
20:47Accounting ignores your price level changes.
20:51And what is your third A?
20:54Accounting ignores your qualitative elements.
20:59And what is your last A?
21:03Accounting may lead to window dressing.
21:06So we will cover the U point first.
21:11Then we will cover all the A points.
21:15So here we go.
21:24Just a second.
21:27Yeah.
21:29So unrealistic information.
21:32Unrealistic information.
21:34Information is not reliable.
21:38It becomes unreliable and unrealistic.
21:42Unreal means real information.
21:45Unreal means it is not real.
21:49So although accounts are prepared following the principles of accounting.
21:54But it is based on some unrealistic concepts also.
22:08For example, assets are recorded on their cost and depreciated over their useful life.
22:15But sometimes assets may not be realized at their book value.
22:20What is this concept?
22:22We record our assets on historical cost in the balance sheet.
22:28As much as we bought.
22:30So assets will be shown to you at the same cost year on year.
22:37But what should happen?
22:39Because the value of money keeps changing.
22:42For example, if I have a house worth 1 crore.
22:49What will happen after 10 years?
22:52It can be worth 2 crore or 3 crore.
22:55There can be changes in it.
22:57So there can be appreciation in it.
23:00So what do we do?
23:02I am showing that house or building at 1 crore, 1 crore, 1 crore.
23:09Every year in the balance sheet.
23:11So this is not real.
23:13We ignore the price level changes.
23:21And some concepts are not real.
23:27We take some estimations.
23:30Estimation in the sense that we decide the life of the assets.
23:36Whether it is going to last for 10 years or 5 years.
23:39So we take an estimation of the useful life of the asset.
23:43According to which we calculate depreciation.
23:45So the information in this is not real.
23:51Real in the sense that we show it on the cost.
23:55It is possible that after depreciation, we show the book value.
23:59Cost minus depreciation is equal to book value.
24:02So the book value that we are showing in the balance sheet every year.
24:05So it is possible that after 5 years, it will not be realized.
24:09That it is realized less or realized more.
24:13So he has said regarding this thing.
24:17That this information is unrealistic information.
24:20We get to see in accounting.
24:22Hope it is clear.
24:24So look at the accounting, which is blindfolded.
24:30That he ignores the changes.
24:34The changes in money or price are ignored by the account.
24:38So let's do the first point.
24:43This is our U one.
24:47Now our A points are starting.
24:51So what is first?
24:54Accounting is not fully exact.
24:56Although all the transactions are recorded based on the bills and receipts.
25:01Some estimates are also made for ascertaining profit or loss.
25:05For example, estimating the useful life of asset providing for the doubtful debt.
25:10What is he saying in this?
25:12Although he says that we record on the basis of bills and all the evidence.
25:19On the basis of all the receipts, vouchers.
25:23According to that, we record in our books.
25:29But sometimes we estimate the life of the asset.
25:37Whether it is going to last for 5 years or 10 years.
25:40So it depends on how the business is taking it.
25:44And sometimes there is one more thing.
25:46You put the PDD yourself.
25:50Provision for doubtful debts.
25:53What are debtors?
25:54The person who owes money to the business.
26:01Suppose I am a business and you have to give me money.
26:07Because I had sent you goods on credit.
26:10So what did you become?
26:11You became my debtor.
26:13Sometimes the business thinks that you can ask for my money.
26:23I can't get it.
26:26You don't give it to me.
26:27So I make a provision for it from now on.
26:32According to the Provence Principle.
26:34You record your losses and risks.
26:38Suppose you have to give me 20,000.
26:42And I think I might have 5,000 bad debts.
26:47You don't give it to me.
26:48So what do I do?
26:50I make a PDD for it.
26:52Provision for doubtful debts.
26:53I can make it for 10,000 or 15,000.
26:56So this will show your profits less.
27:00And your taxation will show less.
27:03Accounting takes some estimation.
27:08Because of which we can't get a clear picture of a business.
27:13Hope it's clear.
27:16And the third point is.
27:20Accounting ignores the effect of price level changes.
27:24We just discussed that we ignore price level changes.
27:28Because we might get appreciation in the coming years.
27:33I might get less value.
27:35If I sell, I will get less.
27:37Accounting ignores that.
27:40Accounting statements are prepared at historical cost.
27:45But the value of money changes frequently.
27:47As we discussed earlier.
27:50As we discussed, we put the value in the balance sheet at historical cost.
28:00So accounting ignores the value of money.
28:05But the value of money keeps changing frequently.
28:09It doesn't remain stable.
28:11The value that we get today in 10 rupees.
28:15We won't get it in the coming 1-2 years.
28:19We will have to pay more for it.
28:21It's not easy.
28:24Accounting however presumes that the value of money remains stable.
28:29What does accounting believe?
28:30That it is stable.
28:31Value of money is not changing.
28:34Unless price level changes are considered.
28:37Accounting information will not show the correct financial result.
28:41What do the scholars say in favour of this?
28:47Until you don't see the real picture of the business.
28:55Until you don't consider the price level changes.
29:00So this is the drawback of accounting.
29:03Hope it's clear.
29:07So let's move towards point no. 4.
29:15So accounting ignores the qualitative elements.
29:18What is accounting?
29:20We saw that our management is very good.
29:22Our employees are of good calibre.
29:25They work very well.
29:27That's why the company can earn good profits.
29:30But those things.
29:31Suppose we appointed a manager.
29:34Maybe there was a strike.
29:36Maybe we resigned a manager or an employee.
29:42And you are suffering a lot.
29:45But accounting ignores such things.
29:50It doesn't record.
29:52In the beginning, we saw which transactions we record.
29:56We record our financial transactions.
30:01We don't record non-financial transactions.
30:06It may have an effect on our business.
30:10But because we take the quantitative aspect in accounting.
30:16So this becomes a drawback of accounting.
30:19That it ignores the qualitative aspect.
30:23So accounting is confined to monetary matters only.
30:28Therefore, qualitative elements.
30:30Like the skill of management and staff.
30:33How are your industrial relations?
30:36Public relations are ignored.
30:38The company's relations with the public.
30:42Or the company's relations with other industries.
30:46They matter a lot.
30:48It has a lot of impact on your business.
30:52If they are good, they will have a good impact.
30:55If your relations are bad, it will have a bad impact on your business.
31:00But accounting ignores such things.
31:04So this becomes a drawback of accounting.
31:07That accounting ignores the qualitative elements.
31:19Now we have point number 5.
31:21This is the last point of this session.
31:24Accounting may lead to window dressing.
31:27What is window dressing?
31:29When we manipulate the accounts.
31:34That our profit may be higher.
31:37But we want to show them less to the GST department.
31:41So we may have increased the depreciation.
31:45We have increased the PDG.
31:47So that our profit is less in the books.
31:52Manipulation happens with the accounts.
31:56There is friction.
31:58Because of which we do not get a real picture of the business.
32:05So accounting may lead to window dressing.
32:08The term window dressing means.
32:10The manipulation of accounts in a way to conceal the vital effects.
32:14Conceal the vital effects means.
32:17What we need to give to the public or the GST department.
32:21Or the income tax department.
32:23We conceal it.
32:25We hide it.
32:27And present the financial statements.
32:30To show a better position than what it is.
32:34Sometimes we show a better position.
32:36To put our impact in front of the public.
32:39To purchase our shares.
32:41Our business is running very well.
32:43But sometimes that situation does not happen.
32:46In this situation, the income statement fails.
32:50To provide a true and fair view of the profit or loss.
32:54How will the income statement show us wrong?
32:57The profit or loss of the business.
33:00And the balance sheet also fails.
33:02To provide an accurate financial position.
33:05Of the business.
33:07Financial position of the business.
33:09If we put less depreciation.
33:12Or more depreciation.
33:14The effect of PDD also comes.
33:16In the balance sheet.
33:18The balance sheet will also show a wrong picture.
33:20Ultimately.
33:22We do not get a real picture of the business.
33:27These are the drawbacks of accounting.
33:30Today we did.
33:32Functions of accounting.
33:34And drawbacks of accounting.
33:37I hope you liked the video.
33:39I need your support.
33:41Kindly subscribe to this channel.
33:44If you like it.
33:46Then press the like button.
33:48See you in the next video.
33:50Till then stay tuned.
33:52Thank you so much.
33:56Transcription by ESO. Translation by —