Accounting Issues
Accounting refers to recording financial transactions and reporting financial results. Accountants learn the practical steps to accomplish their tasks throughout their education. In order to maintain consistency in accounting practice, accountants follow certain standards. These standards lead to potential accounting issues for individuals using the reported financial data.
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Historical Cost
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College trains accountants to record every transaction at the actual, or historical, cost. The issue with using historical cost is that values change as time passes. Assets purchased for one price may increase or decrease in value, but the dollar amount reported remains unchanged. Accountants use historical cost in order to maintain objectivity. The historical value can be easily verified by referring to the original paperwork. Revising the cost to reflect current values require a subjective viewpoint with little documentation to support that value. Because financial reports incorporate historical cost, the users of financial reports can easily misinterpret the value of the assets listed or the value of the business overall.
Use of Estimates
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In some situations, actual values are unknown and the accountant must use estimates to record financial transactions. The issue with using estimates is that the actual number can vary significantly. Examples of values based on estimates include warranty claims and uncollectible accounts receivable amounts. The accountant attempts to estimate the number of customers who will default on their accounts or what percentage of products will be returned for warranty work. The accountant records these amounts into the financial records and reports these on the financial statements. Users of the financial statements rely on the information presented, even if the estimates prove inaccurate.
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Financial Statement Limitations
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Accountants produce financial statements that owners, lenders and suppliers use to make decisions. Financial statements come with their own set of limitations. Financial statements communicate past financial results, not future results. Users of financial statements make future decisions using no future information. Financial statements also lack details that may influence the user's decision. Users who rely only on the financial statements lack the full picture of the company's performance.
Lack of Big Picture Perspective
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Most accountants spend their days chasing numbers and recording transactions. They lack the understanding of how individual transactions impact the company overall. The issue lies with the accountant's focus on the details and not the big picture. Business owners and department managers need to see how events and transactions impact their area. Accountants often lack the ability to come alongside the business owner or department manager as a partner because they get lost in the numbers.
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