Question -
Answer -
The following are the difficulties that are encountered by a trader due to incompleteness of accounting records.
1. Accuracy of accounts: Arithmetical accuracy of accounts can not be ascertained, since proper records of accounts are not maintained. Consequently, Trial Balance cannot be prepared.
2. Encourages fraud: As the arithmetical accuracy cannot be determined; so, this encourages fraud and provides sufficient scope for bluffing and carelessness.
3. Difficult to ascertain correct profit or loss: Since all expenses and income are not recorded, true profit or loss cannot be correctly ascertained.
4. Difficult to analyse the true financial position: As profit or loss cannot be ascertained easily, so the Balance Sheet cannot be easily prepared. Hence, the absence of Balance Sheet will not reflect the true financial position of the business.
5. Difficulty in comparison: Due to the incomplete records and non-availability of previous years’ data, comparison is not possible. By the same token, comparisons with other firms are also not possible.
6. Unacceptable to tax authorities: It does not reflect the true and acceptable presentation of expenses and revenues. Hence, these are not acceptable by the tax authorities.
7. Raising funds: Since analysis of solvency, profitability and liquidity of business cannot be done, it is difficult to raise fund from outside.