Question about rounding numbers in financial reports

This issue here is materiality. In both cases (rounding each number and them summing, or rounding the total) you end up with a difference that is not material. HOWEVER, if you have a very long list of numbers that you round and sum, you could end up with a difference that is material. The safest thing to do is to total all of the numbers and then round the total.

John R. Jorgensen BBA Accounting

John,

Thanks for the reply.

Your answer reminded me of what I vaguely remembered about materiality from a begining accounting class many years ago. Since I don't work in accounting field, one thing I am not certain is how most people show numbers on their financial reports.

Is there a standard or widely accepted practice or rules that deals with the issue of rounding numbers?

Does the so called GAAP has any say on the issue?

Thanks.

-CG

The fundamental principle of GAAP is that what is presented in a company's financial statements conveys an accurate picture of the company's financial position. There is not a specific rule, guideline or regulation that states, "figures must be rounded in this fashion." Rather, you take into consideration how the data is presented in your financial statements.

For example, a small company would tally up all of their sales revenue for the appropriate period and probably round to the nearest dollar. A large corporation would tally up their sales revenue and round to the nearest thousand dollars (at the top of their statements it will say something to the effect that all numbers are in thousands). For the small company, rounding to the nearest thousand would be not be acceptable since it could be a material misrepresentation. For the large corporation, it's no problem.

John R. Jorgensen BBA Accounting

I agree with John regarding materiality, but I have a couple of other comments.

If these numbers hit the balance sheet, assets must still equal liabilities plus equity. Let's say, for a simple example, that these numbers represent different types of assets. If liabilities are clearly 1001 and equity is clearly 3000, how would you round?

When it comes to >Hi.

Beverly

Beverly, You are correct, the equation must always balance. However, if you have done all of your audit work corretly, then the maximum rounding error you should see would be $1 per account. For a small company this would probably be less than $100. For a large company this number could be in the $100,000 range.

It should, however, be pointed out that you don't just round all the accounts and throw them into the financial statements to see if they balance. You start with the unadjusted trial balance and make certain that your accounts are properly reconciled. You then make all of your adjusting entries and then close out your contra/temp accounts. By the time you've done all of this, Asset = Liabilities + OE to the dollar.

John R. Jorgensen BBA Accounting

Hi CG

This is a great question that has impact on the accounting treatment of all financial accounts. There is not one answer to your question, because the numbers depend on the size of your firm. GAAP requires that you statement is relevant and reliable. If you are making calculations for a small firm, where there are no public investors or shareholders, it may not be beneficial to spend too much time figuring out the exact amount. Cost vs. benefit. Your main concern should be if you are giving the users of the financial statements a reliable and relevant view of your company.

Take Care

EvelynL

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