Accounting Constraints and Modifying Principles
Accounting constraints sometimes referred to as modifying principles, are used to modify accounting assumptions and accounting concepts to make accounting information in financial statements more useful for users.
What are the Accounting Constraints?
The following are the main accounting constraints to consider when preparing financial statements:
- Materiality Accounting Constraint
- Conservatism Accounting Constraint
- Consistency Accounting Constraint
- Cost Benefit Accounting Constraint
- Verifiable and Objective Evidence Accounting Concept: Each accounting transaction should have adequate (verifiable) documentary evidence to support it, and this evidence should be free from bias (objective).
The full disclosure accounting concept requires that all information significant to the user of the financial statements should be disclosed. This accounting constraint allows unimportant and immaterial information to be left out or merged with other financial information.
The prudence or conservatism accounting constraint dictates that all potential losses are taken into the financial statements, but all potential profits are left out.
The accounting assumptions and concepts used in the preparation of financial statements should be applied consistently from year to year. This allows meaningful comparisons to be made by users.
The cost of applying an accounting concept should not be more than the benefit derived from it. If the cost is more than the benefit then that concept should be modified.
Accounting Constraints and Accounting Principles
The constraints are one part of a framework established by an agreed set of principles, as illustrated in the diagram below:
The accounting principles diagram is available for download in PDF format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.