Constraints accounting

Constraints accounting (CA) allow some variations generally accepted accounting principles(GAAP) when reporting financial statements of company and these variations do not violate the GAAP in light of recognised CA. CA contains explicit consideration of the role of constraints in accounting and constraints relate to limitations when providing financial information. The definition of a constraint is a regulation which belongs to prescribed bounds and there are four main types of constraints which are the cost-benefit relationship, materiality, industry practices, and conservatism, and these constraints are also accounting guidelines which border the hierarchy of qualitative information. Constraints accounting (CA) allow some variations generally accepted accounting principles(GAAP) when reporting financial statements of company and these variations do not violate the GAAP in light of recognised CA. CA contains explicit consideration of the role of constraints in accounting and constraints relate to limitations when providing financial information. The definition of a constraint is a regulation which belongs to prescribed bounds and there are four main types of constraints which are the cost-benefit relationship, materiality, industry practices, and conservatism, and these constraints are also accounting guidelines which border the hierarchy of qualitative information. The cost-benefit relationship constraint is also called cost effectiveness constraints and is pervasive throughout the framework. The companies need to spend money and time in the process of providing financial statements. To be more specific, Costs can constraint the range of information when providing financial reporting on the grounds that the companies must 'collect, process, analyze and disseminate relevant information' which need time and money. For investors, they want to know all financial information if possible in ideal condition, which may cause tremendous financial burden in the corporations. Moreover, some financial information may not valuable for external users to acquire a huge benefit, for example, how much money do a company spend for its greening of headquarters. Therefore, when deciding the components of financial reporting, companies need to measure the sense of particular financial information and the expenditure of providing particular information and the benefits they can acquire from this particular information. Properly speaking, If the costs in particular information exceed the benefit they can acquire, companies may choose to not disclose this particular information. For example, If there is $0.1 difference between checkbook register and bank statement, accountant should ignore the $0.1 rather than waste time and money to find the $0.1. Companies need to consider materiality when providing financial information. Particularly, companies must disclose the material information which can influence the financial performance and some immaterial information can be excluded. For example, a company owns $10 million net assets and therefore a default of customer with $1000 is immateriality and in contrast if the amount of default is $2 million, which can influence the financial decisions and thus means material. However, there are also some small items which can transfer net profit to net loss and these item can be considered as material items. In order to judge whether the information is material or not, companies can based on the following materiality process: Expected: