Question

4 potential pitfalls in using accounting data in decision making

Answer 1

4 potential pitfalls in using accounting data are as follows:

1) If accounting data are based on historical records then it might not be useful for future decision making. Historical data are of no use if the value of asset keeps on changing or there is huge diiference historical cost of asset and fair value of asset.

2) Similiarly if the accounting data are based on traditional costing then it may be misleading in nature because now a days activity based costing are used in industry to allocate overhead cost.

3) In the modern era of accounting, computerised accounting are used and Computerized accounting systems are vulnerable to cyber security issues.Cloud-based systems store accounting data and it can be hacked. So, using of computerised accounting data may be misleading in nature.

4) Human intervention is there to record accounting data. Accounting is all about numbers. In the past, all the data entry was done manually which led to it being more prone to errors. However, nowadays although there are various software to do the manual part but the risk remains the same. Human intervention is still there to record accounting data.Thereby, any errors in number punching or decimals could have an impact as the error is carried forward across the different financial statements.