- business be disclosed or presented on the financial statements or in the notes to

financial statements.

Accounting Constraints
- The constraints of accounting refer to the limitations to providing financial information.

- Financial reporting must follow generally accepted accounting principles, or GAAP. The
constraints of accounting permit certain variations from the basic accounting principles in
reporting a company's financial information.

- Such variations are not considered a violation of the GAAP because of the recognized
constraints of accounting.

1. Materiality

- Information is material if omitting it or misstating it could influence

decisions that the primary users of general purpose financial reports
make on the basis of those reports which provide financial information
about a specific reporting entity.

- Materiality is an aspect of relevance based on the nature or magnitude, or

both, of the items to which the information relates in the context of an
individual entity’s financial report.

- Materiality refers to the significance of an item in relation to a particular

situation or set of facts.

2. Conservatism or Prudence

- It is the exercise of caution when making judgements under conditions of

uncertainty.

- Given two acceptable methods, the method that will result in a lower
amount of asset and net income should be selected.

- Equally, the exercise of prudence does not allow for the understatement
of assets or income or the overstatement of liabilities or expenses.

3. Cost-benefit relationship

- Reporting financial information entails recording costs, and it is important

that those costs are justified by the benefits of reporting that information.

- Cost-Benefit Test says that the cost of gathering information to fully

comply with an accounting principle or rule should be justified by a benefit
that would result if the preferred treatment is followed.