Why are the amounts on the financial statements rounded to thousands or millions?
Different people may have different understanding about the definition of financial statements.
According to some international accounting standards, the financial statements are classified to be the statement of comprehensive income, which is generally called the income statement, the statement of financial position, which is the balance sheet in general, and the statement of cash flow. These three are the major financial statements used by companies all around the world. There may be differences slightly in the formatting, but the principles guiding the formation of these reports would not be changed.
Reasons for rounding
Some of the people doubt that the financial statements would not be reliable if the company tries to round the figures to thousands or millions. However, this is not something true. In the accounting industry, there is a rule called materiality. This materiality principle states that the accountants, when preparing the financial statements or other records about accounting, should work hard to ensure that there are no significant errors in the accounting records. In other words, the financial report may not have to be fully accurate. However, the financial report should be fairly true.
When you read the financial report of some companies, you would understand that there is a need to round the figures. For example, Google has billions of turn-over of sales from time to time. Therefore, the figures reported in the financial statements would be very large. If exact value should be provided, there could be 2 to 3 decimal places in the financial reports. This would cause serious trouble for people to read through the statements. Therefore, they would prefer to simplify the financial statement by rounding everything to thousands or even millions.
Some people may think that the balance sheet would have problem as a result of the rounding work. However, this is not true because the accountants would usually double check the figures and make sure that the figures can be balanced in the balance sheet. This is the job that accountants would try to do when they try to prepare the financial report. For some large partnerships or limited companies, there would be auditors reviewing the financial reports and to ensure that there would not be problem in the financial statements. Therefore, you would find that the rounding of figures would not lead to many problems in the financial statements. Instead, it can help make the statements more user-friendly.
Usually, the financial statements would have a consistent change in the rounding. In other words, the income statement of Company A would not round in thousands if the balance sheet of this company has already rounded the figures to millions. Therefore, you would not find it difficult to follow the information and then read the comprehensive information from the statements.
All in all, financial statements are rounded to thousands or millions between there is a need for the companies to make things simple. The amount of differences would usually be too small to affect the reliability of the statement so the company would not mind doing this type of adjustment.
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