The limitations enumerated above are the general limitations applicable to financial statements. Let us now deal with the limitations inherent in the preparation and presentation of balance sheet. The following limitations in respect of the position statement i.e., the balance sheet are worth noting:

1. Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not contain certain assets and liabilities.

Example: The Efficient Management force is a Human Asset available to the organization and so far no efforts are made to show the human assets under the asset side of the Balance Sheet. Similarly, dissatisfied labor force is a liability to the organization.

1. An investor who wishes to analyze the balance sheet is more concerned with the present and future whereas the balance sheet pertains to a point of time relating to past and therefore may not be quite helpful.

2. Personal judgment plays a great part in determining the figures for the balance sheet.

Example: Provision for depreciation, stock valuation, provision for bad debts are based more on the personal judgment and are therefore not free from bias.

1. Even the audited balance sheets also cannot give a complete seal of accuracy. Deliberate manipulations in the profits, current assets and closing stocks make the balance sheets unreliable.

2. The factors, which have vital bearing on the earnings of the organization such as changes in the managerial personnel, cessation of agreements, and loss of markets, are not disclosed by the balance sheet.

3. Financial statements are based on accounting policies which vary from enterprise to enterprise both within the country and among the countries. The users of financial statements cannot understand them clearly and are prone to compare unless the significant accounting policies which have been adopted in preparing the financial statements are disclosed very clearly.

4. Balance sheet is prepared on a particular date and hence there is every possibility of 'Window-dressing'.

5. The values of various assets within the balance sheet are not always measured according to the same rule. For example, accounts receivables are always measured at a net realizable value which the organization believes will be ultimately collectible. But in the same balance sheet one item furniture and fixtures is measured on historical cost basis. Thus one item of balance sheet may be incomparable with another item.

6. Another limitation is with regard to the treatment of loss contingencies. Loss contingencies are potential obligations that might arise from a past event and involve a great degree of uncertainty.  Such contingencies, if they are considered probable have to be provided for in tune with the accounting principles. Any disregard of such contingencies would overstate the company's performance in the current period as well as overstate the company's equity position.

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