Limitations of the accounting system

Introduction

Accounting is a system adapted to classify the economic events that occur in a business. In such a way that, it becomes the central axis to carry out various procedures that will lead to obtaining the maximum economic performance involved in setting up a specific company.

The challenge that the environment poses to the executive today has forced him to depend more and more on information as an objective basis to exercise a vital function: decision-making.

The foregoing should not deserve any comment, since information has always existed and exists in every company. However, what generally happens is that the information circulates from, to and within the company is not adequate to the informational needs and is produced by a series of information centers scattered throughout the organization, without coordination between them; causing, in many opportunities duplication of unjustified efforts.

Accounting Concept

Accounting is a business tool that allows the systematic registration and control of all operations carried out in the company, therefore there is no specific definition of accounting although all these definitions have something in common.

Below are several meanings of accounting that have been defined by different authors and collegiate bodies of the accounting profession:

"Accounting is the art of recording, classifying and summarizing in a meaningful way and in terms of money, operations and events that are at least of a financial nature, as well as interpreting their results" (American Institute of Certified Public Accountants)

"Accounting is the system that measures business activities, processes that information into reports and communicates these findings to decision makers" (Horngren & Harrison. 1991)

"Accounting is the art of interpreting, measuring and describing economic activity" (Meigs, Robert., 1992)

"Accounting is the language that entrepreneurs use to be able to measure and present the results obtained in the financial year, the financial situation of the companies, the changes in the financial position and / or in the cash flow" (Catacora, Fernando, 1998)

"Accounting has various functions, but its main objective is to provide, when required or on specified dates, reasoned information, based on technical records, of the operations carried out by a public or private entity" (Redondo, A., 2001)

Accounting is a technique that deals with recording, classifying and summarizing the mercantile operations of a business in order to interpret its results, so that managers through it can guide themselves on the course that their business follows through accounting data; Thus allowing to know the stability, the solvency of the company and the financial capacity of the company.

Structure of an accounting system

An accounting information system follows a basic model and a well-designed information system, thus offering control, compatibility, flexibility and an acceptable cost / benefit ratio.

The accounting system of any company regardless of the accounting system that I used, three basic steps must be executed using related to financial activities; The data must be recorded, classified and summarized, however the accounting process involves communication to those who are interested and the interpretation of accounting information to help in making business decisions.

1. Record of financial activity: an accounting system must keep a systematic record of daily business activity in economic terms. In a company all kinds of transactions are carried out that can be expressed in monetary terms and that must be recorded in the accounting books. A transaction refers to a completed action rather than a possible future action. Certainly not all business events can be objectively measured and described in monetary terms.

2. Information classification - A complete record of all business activities commonly involves a large volume of data, too large and diverse to be useful to decision-makers. Therefore, the information must be classified into groups or categories. Those transactions through which money is received or paid should be grouped.

3. Summary of information: for the accounting information used by decision-makers, it must be summarized. For example, a complete account of the sales transactions of a company like Mars would be too long for anyone to read. Employees responsible for purchasing merchandise need summary sales information by product. Warehouse managers will need the sales information summarized by department, while Mars senior management will need the sales information summarized by warehouse.

These three steps that have been described: registration, classification and summary constitute the means used to create the accounting information. However, the accounting process includes more than the creation of information, it also involves the communication of this information to those who are interested and the interpretation of the accounting information to help in making business decisions. An accounting system must provide information to managers and also to various external users who have an interest in the financial activities of the company.

Use of Accounting Information

Accounting goes beyond the process of creating records and reports. The ultimate goal of accounting is the use of this information, its analysis and interpretation. Accountants are concerned with understanding the meaning of the amounts they obtain. They look for the relationship between business events and financial results; they study the effect of different alternatives, for example the purchase or lease of a new building; and they look for significant trends that suggest what may happen in the future.

If managers, investors, creditors, or government employees are to make effective use of accounting information, they must also have an understanding of how they obtained those figures and what they mean. An important part of this understanding is clear recognition of the limitations of accounting reports. A business manager or other person who is in a decision-making position and lacks accounting knowledge will probably not appreciate the extent to which accounting information is based on estimates rather than precise and accurate measurements.

Characteristics of an effective accounting information system.

A well-designed information system offers control, compatibility, flexibility, and an acceptable cost / benefit ratio.

Control: a good accounting system gives management control over the operations of the business. Internal controls are the methods and procedures that a business uses to authorize operations, protect its assets, and ensure the accuracy of its accounting records.

Compatibility: an information system meets the compatibility guideline when

operates smoothly with the structure, personnel, and special characteristics of a particular business.

Objectives of accounting information.

Accounting information must be used primarily to:

Know and demonstrate the resources controlled by an economic entity, the obligations it has to transfer resources to other entities, the changes that such resources have experienced and the result obtained in the period.

• Predict cash flows.

• Support managers in the planning, organization and management of businesses.

• Make investment and credit decisions.

• Evaluate the management of the administrators of the economic entity.

• Exercise control over the operations of the economic entity.

• Support the determination of tax burdens, prices and rates.

• Assist in the creation of national statistical information.

• Contribute to the evaluation of the benefit or social impact that the economic activity represents for the community.

Qualities of accounting information

In order to adequately satisfy its objectives, the accounting information must be understandable, useful and in certain cases it is also required that the information be comparable.

• Information is understandable when it is clear and easy to understand.

• The information is useful when it is relevant and reliable.

• Information is relevant when it has the feedback value, prediction value, and is timely.

• Information is reliable when it is neutral, verifiable and to the extent that it faithfully represents economic facts.

Importance of accounting depending on the users of the information.

Accounting is of great importance because all companies have a need to keep track of their business and financial negotiations. This way you will obtain greater productivity and use of your assets. On the other hand, the services provided by accounting are essential to obtain legal information.

The people involved in the business world - owners, managers, bankers, stockbrokers, investors - use accounting terms and concepts to describe the resources and activities of any business, large or small. Although the

Accounting has achieved its most remarkable progress in the field of business, the accounting function is vital in all units of our society. A person must explain their income and file a tax return. Often times, a person must provide personal accounting information in order to purchase a car or house, receive a scholarship, obtain a credit card, or obtain a bank loan. Large stock companies are accountable to their shareholders, to government agencies, and to the public. The government, states, cities and educational centers must use accounting as a basis to control their resources and measure their achievements. Accounting is equally essential to the successful operation of a business, university, community, social program, or city.All citizens need some knowledge of accounting if they want to act smart and accept challenges imposed by society.

The people who receive the accounting reports are called users of accounting information.

A business manager or other person who is in a decision-making position and lacks accounting knowledge will probably not appreciate the extent to which accounting information is based on estimates rather than precise and accurate measurements.

Information requirements and their environment

One of the aspects that must be considered when studying the company through the systems approach is the environment, the environment in which it is inserted and to which it belongs with a sense of dependence. This dependence and subordination of the company to its environment, poses certain demands to which it must adhere and / or provide answers.

The purpose of any company can be considered in three different levels:

to. Produce goods and / or services efficiently in order to better satisfy the needs of the population.

b. Achieve positive results in the development of their activities.

c. Allow the fulfillment of man in his work and contribute to his integral development, on the one hand, and on the other, fulfill the social and public obligations to which he is obliged by the fact of being a member of a community.

The above is without considering the ultimate goal of the company, which is to achieve survival and development to achieve its objectives.

The environment needs information from all three aspects. This information is materialized in statements to reports that come from the company's information system.

The centers that require information are identified as agencies and institutions of a sectoral and national nature, such as ministries, superintendency of: Corporations, Banks and Financial Institutions, Odeplan and the Central Bank. The information that the environment needs, traditionally for the most part, is satisfied by the financial statements provided by the accounting information subsystem. This information is characterized by being aggregated.

On the other hand, the internal information requirements are relatively greater and more complex, because the information is the basis on which the permanent decision-making that occurs at all levels and in all areas of the company is based. If we also consider that the main functions of the administrative process (identified as investigation and diagnosis, planning and control) determine needs for differentiated information with diametrically opposed characteristics, the difficulties faced by the information system to «produce» what it is about are evident. expected. Thus, for example, in research and diagnosis, information on past and present events is of interest and is, therefore, objective and possible to verify. Instead,planning requires projected information that shows consequences of various alternatives; This information is subjective, even when it is based on known facts and tends not to be verifiable.

The control, for its part, needs standards that allow it to measure and evaluate, consequently, the information must allow monitoring the results in a timely manner in order to make corrections. For this, it must be easily accessible and as close as possible to the place where the events take place.

In many opportunities the real problem is not found in not having the necessary information, but is given by the opposite situation, that is, having too much information. This situation comes mainly from the following causes:

to. There is no study to determine the real information needs.

b. The information needs are not periodically reviewed for:

Detect the one that is no longer useful and remove it from the system. Collect the new requirements and add them to the system.

c. When what is indicated in a and b is carried out, it is generally a long and arduous work to determine the needs of the users, to the extent that they do not have sufficient clarity regarding their functions and attributions

Limitations of Accounting Information

First of all, the limitations of the accounting information will depend on the type of information that is being used, since the information depends on the business of the company. For this reason we are going to name some of the limitations that these systems have, since covering them all would be very difficult. We will focus mainly on the information that affects the control, relation with the company's costs and with the decision-making of the company.

Unit Costs

Knowing the unit costs of the product is important if you want to cost inventory, or measure profits. This data is useful for cost control and decision making. This information can lead to pricing measures, which is useful when the company sets prices for its products.

The limitations of this information in terms of cost control and decision making are the following:

1.- The unit costs of the product are average costs, generally in decision-making the incremental costs are taken into account and not the average ones. Many companies in order to offer this information occupies variable costs since they can be considered incremental.

2.- Total unit costs include direct and indirect costs. From a control and decision-making point of view, the assigned costs are not relevant.

3.- Indirect manufacturing costs included in unit costs are generally an application of predetermined rates to indirect costs.

Standard Costs

Standard costs are scientifically predetermined costs that serve as the basis for measuring actual performance. Standard accounting costs do not need to be incorporated into the accounting system. Manufacturing cost standards are generally formally integrated into cost accounts. When this occurs the systems are known as standard cost accounting systems. In if these costs are the opposite of the real costs; standard costs are determined in advance of production.

The limitations of these costs would be:

1.- In practice it is very difficult to adapt to a specific conceptual structure.

2.- The rigidity or flexibility of the standards cannot be calculated with precision.

3.- There is no certainty that the standards have been established throughout the company with the same rigidity or flexibility.

conclusion

Based on the bibliographic review carried out around the central theme of this work, it can currently be stated that the process of counting and recording financial data is developed in a simpler and easier way with the support of the accountant, but, it is necessary to clarify that they continue to be governed by the principles established to execute business accounting.

Accounting information, and therefore accounting, is not an exact language, neither because of the nature of the facts it records nor because of the lack of a single, complete and mandatory accounting code. There is, therefore, a legitimate, fair and honest margin of discretion in the registration, interpretation and use of the data you provide.

The administration of an estate, to be efficient, will require the help of accounting, which provides all the data required for decision-making in a company based on technical and reasoned information.