Constraints in Accounting

Constraints in Accounting - Constraints in Accounting...

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Constraints in Accounting Efforts to provide useful financial information can be costly to a company. Therefore, the profession has agreed upon constraints to ensure that companies apply accounting rules in a reasonable fashion, from the perspectives of both the company and the user. The constraints are materiality and conservatism. Materiality Materiality relates to a financial statement item's impact on a company's overall financial condition and operations. An item is material when its size makes it likely to influence the decision of an investor or creditor. It is immaterial if it is too small to impact a decision maker. In short, if the item does not make a difference, the company does not have to follow GAAP in reporting it. To determine the materiality of an amount—that is, to determine its financial significance—the company compares the item with such items as total assets, sales revenue, and net income. To illustrate, assume that Best Buy made a $100 error in recording revenue. Best Buy's total
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This document was uploaded on 11/03/2011 for the course ACCOUNTING ac 201 at Montgomery.

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Constraints in Accounting - Constraints in Accounting...

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