Limitations of Balance Sheet
In this free online accounting training class, today we will discuss about Limitations of 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 Balance sheet
- Why result of balance sheet is not 100% appropriate all the time
Preparing Balance sheet is a necessary step for a company. Balance Sheet illustrates the financial position of any company. Any company can get the accurate financial statement through maintaining a balance sheet. Though Balance Sheet is very useful for displaying the information on assets, liabilities, owner’s equity of any company; it has some limitations as well. A Balance Sheet could not always be considered as perfect accounting statement due to these limitations.
The limitations of balance sheet are not numerous but these limitations make the balance sheet incomplete as well as company’s accounting statement. Now we are going to discuss some limitations of balance sheet:
- The most important limitation of 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’s asset is often neglected in balance sheet. For example, ABC Company has bought a land at 2500,000 USD 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 balance sheet.
- The second limitation of 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 the 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 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, so the statement or report of balance sheet is often considered as imperfect accounting statement. But balance sheet is one of the most important parts of the company as it shows financial position of a company in a summarized manner.