What are the major constraints that can hamper relevant and reliable financial statements?

11substantially a judgmental process.Initially, the costs are incurred by the preparers of theinformation while the benefits are enjoyed largely by the users.3.Balance between Qualitative Characteristics.In practice, a balancing or trade-offbetween qualitative characteristics is often necessary in order to meet the objective offinancial statements.The relative importance of the characteristics in different cases is amatter of professional judgment.Elements of Financial Statements1.The elements directly related to the measurement of financial position in thebalancesheetare:a)assetsb)liabilities andc)equity.2.The elements directly related to the measurement of performance in theincomestatementare:a)income andb)expenses.3.Thestatement of changes in financial positionusually reflects income statementelements and changes in balance sheet elements.Recognition of the Elements of Financial StatementsRecognition is the process of incorporating in the balance sheet or income statement an item that meets thedefinition of an element and satisfies the criteria for recognition.An item that meets the definition of anelement should be recognized if:-it is probable that any future economic benefit associated with the item will flow to orfrom the enterprise; and-the item has a cost or value that can be measured with reliability.Measurement of the Elements of Financial StatementsMeasurement is the process of determining the monetary amounts at which the elements of financialstatements are to be recognized and carried in the balance sheet and income statement.This involves theselection of the particular basis of measurement.This includes historical cost, current cost, realizable valueand present value.The measurement basis most commonly adopted by enterprises in preparing financialstatements is historical cost.

We’ve updated our privacy policy so that we are compliant with changing global privacy regulations and to provide you with insight into the limited ways in which we use your data.

You can read the details below. By accepting, you agree to the updated privacy policy.

Thank you!

View updated privacy policy

We've encountered a problem, please try again.

In this article, we will learn in-depth about accounting constraints, including their definition, 4 important constraints, and much more.

What is Accounting Constraint?

The idea that influences the application of accounting principles is called accounting constraint. 

Since they are hindered in the application of accounting principles, they are called accounting constraints.

4 Important Accounting Constraints

The 4 important accounting constraints are discussed below:

1. Materiality Principle

The main task of accounting is to calculate the capital, liabilities, assets, and profit or loss of a business and to serve the people interested in the consequences. The main objective of accounting is to publish important information in this regard.

According to this principle, it is necessary to judge the relevance of all such information when recording all information.

The materiality principle states that the economic impact of all issues or events is of little or no consideration to the needs of users, these issues are of no importance at all and they cannot be published.

For example, if a company purchases a building for $8, 99,950, and the value of that building can be shown at $9, 00,000 in the Balance Sheet. 

Although money is often small, it can be important and should be shown according to the significance of the event.

For example, if an employee stole $10 from a cash fund, the figure is less important, but this information is very relevant and should be shown in accounts.

2. Conservatism Principle

When preparing financial statements, all transactions that have uncertainties need to be conservative in view so that property and income do not appear excessively in the financial statements.

For example,

In Mr. Wood’s book of accounts at the end of 2018

Furniture:               

purchase price $10,000 and Market Value $8,000

Machinery:             

Purchase price $25,000 and Market value $ 28,000

Closing stock: 

Purchase price $5,000 and Market value $ 3,000       

Now, according to the principle of conservatism, the assets will be accounted for at the lowest price between market value and purchase price.

You can also read :

• Accounting concepts or Assumption 
• 6 Accounting Principles
• Accounting Convention

3. Cost-Benefit Comparison

According to this assumption, the benefit of accounting information users get from the specific information will be more than the responsibility for it. If the benefit is less than the expense, the information is not acceptable to the users.

According to the full disclosure principle, the organization is required to publish accurate and reliable information in the financial statements. No information can be kept secret. But the information that contradicts the business interests is worth not disclosing. It will cost more than the benefits derived from that information. So it hinders the full disclosure principle.

Again, from the point of view of accounting, pen, pencil, rubber, etc. are the assets of the business. But these should be shown as costs rather than as an asset.

Because the cost of these is so low that bringing them to bookkeeping as an asset will cost them more than the benefits of enrolling them.

Therefore, they have to be taken into account when comparing cost benefits, so it is better not to disclose if the cost of collecting any information can be considered to be more than the benefit attained from it.

4. Industrial Practice

Due to the diversity of the business, the financial statements have to be prepared despite deviating from the recognized accounting principles.

That is, special accounting is approved for a particular specialty business organization, and that company prepares its final financial statements according to that particular affiliate account.

For example, special accounting methods have been specified for the service providers (Railway, Bank-Insurance, etc.)

You can Also Read:

• 3 Golden Rules of Accounting
• Accounting Equation and Its impact on Transaction
• Concept of Accounts

What are the constraints on relevant and reliable information?

What are constraints of financial statements?

What are the major constraint on the preparation of financial information?

What are the four basic constraints that underlie the financial accounting structure?