In this free online accounting training class, today we will discuss the Limitations of the balance sheet. From our today’s discussion, you will learn:
- Major limitations of balance sheet
- Why balance sheet does not provide correct information all the time?
- Major weaknesses of the Balance sheet
- Why result of the balance sheet is not 100% appropriate all the time
Preparing a Balance sheet is a necessary step for a company. The balance sheet illustrates the financial position of any company. Any company can get an accurate financial statement by maintaining a balance sheet. Though Balance Sheet is very useful for displaying the information on assets, liabilities, and ownes equity of any company; it has some limitations as well. A Balance Sheet could not always be considered a perfect accounting statement due to these limitations.
The limitations of the balance sheet are not numerous but these limitations make the balance sheet incomplete as well as the company accounting statement. Now we are going to discuss some limitations of the balance sheet:
- The most important limitation of the balance sheet is that it is unable to represent the asset of any company with its current market value. The balance sheet includes the assets and liabilities with their historical cost. So the fair value of the company asset is often neglected in the balance sheet. For example, ABC Company bought land at 2500,000 USD a few years back. Now the current market value of that land is around 350,000 USD but the balance sheet will still include this land with its purchase cost. So the current market value is ignored in the report of the balance sheet.
- The second limitation of the balance sheet is also vital. The balance sheet does not report all assets or products of a company. Although those assets play an important role in the company since they have their financial value, these products are often not recognized in the balance sheet. That means the balance sheet has limitations to recon or figure out such tangible or intangible assets for instance, the employees of ABC company with their productivity and efficiency are very important assets for achieving the targeted goal of that company. But as the company does not effectively quantify the importance of these assets, the balance sheet is unable to illustrate such important products.
As the balance sheet reports the asset as their purchasing cost not at their current market value and the balance sheet is often unable to qualify the value of many tangible and intangible assets, the statement or report of the balance sheet is often considered an imperfect accounting statement. But the balance sheet is one of the most important parts of the company as it shows the financial position of a company in a summarized manner.
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