(a) Mention three disadvantages to a business that does not keep proper accounting records.
(b) Explain the following characteristics of accounting information
i. Relevance
ii. Comparability
iii. Consistency
iv. Reliability
(c) State two limitations in the use of accounting information for business decision making.
Explanation
(a) Disadvantages of not keeping proper accounting records:
(i) Inability to ascertain accurate profit or loss.
(ii) It could lead to the wrong assessment of taxes.
(iii) There is the possibility of arbitrary spending leading to business d
(iv) Fraud and dishonesty will not easily be detected/checked.
(v) It could lead to the loss of vital business records.
(vi) It makes it difficult to prepare financial statements.
(vii) It could lead to difficulty in planning business activities.
(viii) It could lead to inaccurate decisions.
(ix) It makes it difficult for businesses to obtain credit facilities.
x) It makes it difficult to detect errors.
(b) Characteristics of accounting information
(i) Relevance- Accounting information is relevant if it is useful for the intended purpose
(ii) Comparability- This means that accounting information should be capable of being compared with those of similar entities and from one period to another.
(ii) Consistency- This characteristic requires accounting information to be prepared following similar procedures and methods.
(iv) Reliability- This characteristic requires accounting information to be verifiable and factual.
(c) Limitations in the use of accounting information
(i) The use of historical cost reduces the relevance of accounting information in making current decisions.
(ii) Information that cannot be measured in monetary terms is not recorded in accounting and this makes accounting information incomplete.
(ii) Possibility of errors in accounting can reduce the use of account information.
(iv) Where precise information is not available, accountants rely on estimates which may be inaccurate for decisions.
(v) Some businesses window-dress their financial statements, thereby misleading users.
(vi) Businesses use different accounting policies which makes comparison misleading.