What Are the Constraints of Accounting?

Limitations about providing financial accounting are referred to as the constraints of accounting.
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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.

Costs and Benefits

One major constraint of accounting is the costs of providing financial information. Financial reporting is not cost free because companies must spend time and money to collect, process, analyze and disseminate relevant information. In deciding what to include in a financial reporting, companies must weigh the costs of providing particular information against the benefits that can be derived from using the information. Therefore, companies may not require particular accounting measurements or disclosures if the costs of implementing them exceed the benefits accrued to users of the information.

Materiality

While the cost-benefit constraint of accounting may limit the scope of the financial information provided in an effort to control reporting costs, the materiality constraint allows companies to omit certain information that is immaterial and won't have an impact or influence on information users. In other words, companies must include all information that has a material impact on their overall financial performance. Companies determine the materiality of information based on its relative size and importance. When the amount involved is relatively small or the nature of the information at issue is unimportant, companies may resort to the materiality constraint not to report the information.

Industry Practices

While cost-benefit and materiality are the two overriding accounting constraints, industry practices are a less dominant constraint but also part of the reporting environment. Particular industry practices in financial reporting may cause departure from basic accounting standards for companies in certain industries. For example, contrary to recording asset value at historical cost as required by GAAP, companies in the agricultural business may report corps at their market value because it's difficult to estimate original corps cost. The constraint of industry practices allows companies to deviate from some prescribed reporting standards on certain financial information.

Conservatism

Similar to industry practices, conservatism is another less prevalent accounting constraint but should be observed in financial reporting when applicable. Conservatism means that when in doubt about how to report an accounting issue, choose the method that least likely overstates assets and income or understates liabilities and losses. Sometimes companies may find difficult situations in which simply following GAAP may not yield the best reporting results. For example, GAAP doesn't require the accrual of losses on a likely future purchase of inventories, but if the planned purchase is a firm commitment, it's conservative to accrue the losses now from any future price increases.

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