What are Accounting Constraints? – Financial Accounting

Hey everyone. This is the third part of what goes into GAAP, so the first one we've talked about principles, the second we've talked about uh the second one we've talked about uh assumptions, and in this one we're going to be talking about accounting constraints there are two main constraints that would allow us to not have to report uh what we what we would normally maybe think we would need to report on our financial statements. So the first one is what's called the materiality constraint and what this does is it states that only information that would influence a decision of a reasonable person needs to be disclosed. So a good vague example this would be if I'm going to if I reported 50 million dollars in uh what we call accounts receivable, we'll talk about that later on in another video, but that's what people owe us so if we said that we're owed 50 million dollars and I say you know what I made a mistake and I'm off by 500, is me restating my financial statements over 500 out of 50 million dollars really going to change somebody else's decision on whether to invest in me or not that would be immaterial it's not really worth it.

Now if I said okay at 50 million I added a few extra zeros and it's only 50 000 then that's something that's very material and I need to restate that, so that is what the materiality constraint is. Is it really going to if if I do this is it really going to change a reasonable person's decision on whether they're going to invest in me or not that's the materiality constraint, the second one is called the cost benefit constraint and that states that only information with benefits of disclosure greater than the cost of providing it need to be disclosed, so am I going to get my money back from this it's going to cost me money to to to do things it's going to cost me money to submit things, to count up things, to audit things, and stuff like that am I going to get my money just to go back and maybe again going back to the example that we just talked about 50 million over 500 if I'm going to try to find that 500 is it worth me spending all that money am I going to get that back plus some over 500 probably not because it's not going to change many people's decision so it's not there's no cost benefit to me to try to find that 500, and that's it.

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