Financial accounting is the process of preparing financial statements for a business. In other words, materiality equates to importance or significance and pertains to financial data, transactions and even errors. Given the wide range of external information users, accountants should have an idea on how precise information needs to be. Some external users of financial reports include government, regulators, lenders, suppliers and the public.
Preparers of financial statements typically use rules-of-thumb or guidelines to determine what to include or omit and how precise included information needs to be. After all, minor errors can be major depending on the context. Although the error might not affect the balancing of ledger accounts or the Statement of Financial Position, it may not properly reflect the transactions and events that occurred. It also reinforces other accounting concepts, such as fair presentation, and characteristics of financial statements – like accuracy. However, this is not a stringent framework and different countries have various modified versions that are suited to their accounting conventions.
In general purpose financial statements the preciseness of information to be included in financial statements is determined by the Applicable Financial Reporting Framework(obviously a general purpose framework to achieve fair presentation), not by the accountant. As mentioned above, these principles are the globally standardized guidelines for performing financial accounting activities that conform to the double entry system of accounting.
Principle of Permanence: This is an extension of the principle of consistency and it states that in order to compare the financial statements of different accounting periods to interpret and comprehend financial trends, it is necessary that the accounts are maintained in a consistent way. Principle of Periodicity: This principle is completely based upon the accounting period concept and the accrual concept. Claiming that you did not know the standards is seldom accepted as a legitimate reason.
Principle of Non-Compensation: This principle establishes that the entire details of assets, debts, revenues and expenses should be reflected in the financial statements and no attempt should be made to write off any debt against an asset of similar value and an expense against an equal amount of revenue. It states that all accounting transactions must be recorded for a given accounting period.