Materiality Concept of Accounting


Definition of Materiality Concept (Convention, Principle) of Accounting:

Materiality concept (convention, principle) of accounting defines and states that “items, transactions or an event which significantly affect a user’s understanding of accounts should be separately stated”.

Explanation, Use and Application:

Materiality is a concept relates to the importance of the amount of transaction, item or an event. The accountants and analysts often make judgments regarding materiality of different items or events. The other items can be amalgamated with others items to avoid unnecessary details in the accounts. Materiality is a relative term as one of the two companies buying identical computer equipment writes it off immediately, but the smaller company treats it as a non-current asset.

Example 1:

The cost of a $5 pencil-holder is charged off as an asset, at the end of the year in which cost is incurred

Solution:

Materiality concept of accounting states that assets of immaterial or small amounts may be recorded as expenses provided their omission or misstatement could not significantly influence the economic decision of users taken on the basis of the financial statements.

Example 2:

Stationary is bought towards the end of an accounting year. A part of stationary remains unused at the end of the year.

Solution:

In this example, the materiality convention may overrule this treatment and the cost of the stationery inventory may be shown as an expense in the current year’s accounts provided its amount is not material.