7 - Intermediate Accounting (Kieso)

Question

What are the major limitations of the balance sheet as a source of information?

Step-by-Step Solution

Answer

Balance information has some limitations because of the historical cost concept, estimations, and eliminating some items having value.

Definition of Historical Cost Concept

The accounting concept established by the authorized board stating that the business entity might report all the resources at historical price is known as the historical cost concept.

Limitation of Balance Sheet

1. The line items on the balance sheet are not recorded at fair value. Instead, they are reported at historical cost.
2. Estimation is used to determine various line items such as allowance for doubtful accounts and the useful life of the depreciation assets.
3. It does not record all the financial value items. For example, human resources are not recorded on the balance sheet.