Accounting constraints are those that constrain us from reporting certain things on the financial statements. There are
Question:
Accounting constraints are those that constrain us from reporting certain things on the financial statements. There are two main constraints that would allow us to not report information that we would otherwise report on the statements. Materiality Constraint and Benefit ConstraintThe materiality constraint states that only information that would influence a decision of a reasonable person needs to be disclosed. For example, let's say that I reported 50 million dollars in accounts receivable. I then realize that my statement is off by approximately 1 thousand dollars.
Would that discrepancy cause me to restate the financial statements? Probably not, as $1k is material in relation to $50m. It would not change somebody else's decision on whether to invest in me or not. The same example, but I added a few extra zeros and it's only $50,000 in accounts receivable. That would definitely be material. I need to restate that to accurately reflect the position of the firm, as this information is really going to change a reasonable person's decision on whether they're going to invest in me.
What is the Benefit Constraint?
Contemporary Auditing real issues and cases
ISBN: 978-1133187899
9th edition
Authors: Michael C. Knapp