What is the Concept of Materiality in Accounting?
Information is accounting said to be material when the omissions or misinformation’s are capable of influencing the user’s economic decisions based on those financial statements.
It is an essential concept in accounting which states that all the minor or unimportant matters are not to be considered. The important matters should be discussed and disclosed. Information’s that are big and important in a business setting is termed as material items.
In other words, items are said to be materials when they are capable of influencing the decisions. It should have clear intentions of revealing the right and essential information for the respective audience.
It, is, therefore concerned with the importance of transactions, errors, and balances present in those financial statements of a company. Materiality refers to a particular cut-off point after that the information turns out to be relevant for decision-making.
Information in financial statements should be accurate and complete to show the true and accurate recognition of financial statements.
It is explained in dimensions of size and nature of that information concerning the company.
Example: A customer owes one thousand dollars to the company with the net assets amount of ten million dollars.
This information is useless and is not characterized as material information for the company. This is because this information cannot help with the decision-making process.
However, if he mentions a default of two million dollars along with it too, the status of this information changes to become more useful for the audience. Now the information becomes useful or material because it helps with the decision making now.
Example: The company has decided to stop the operations in some particular geographical sector which has been the reason for greater revenue in the past. This set of information is important to be included in those financial statements of the company. The omission of this information may make the statements non-material.
Materiality in accounting has certain other characteristics too that must be fulfilled.
The information should be very relevant to the audience. It should be able to help them with the decision-making. If the stakeholders aren’t able to take any decisions with it, then the information is irrelevant. The irrelevant information is not material information.
The information must be entirely accurate and authentic. Inaccurate or unauthentic information cannot be material information. Non-Reliable information cannot be used for the decision making process. It may further lead to poor decision making because of a false set of information.
The information should be containing all the aspects necessary for the accurate decisions making with the help of it. It should present a transparent and fair company’s status.
It is suggested that any item making 5 % of the total assets should be presented in those financial statements. Any item that can influence the net profit or the net loss is considered as material information.
The concept also changes with the companies. A large company with many activities may consider a $40,000 transaction amount to be non-material. Mentioning this amount is their financial statements or not mentioning of it will not make any difference.
A smaller company with a transaction sum of $40,000 is material information. The total revenue of smaller companies is not too great therefore the smaller sets of information also become material.
In conclusion, materiality in accounting stands for a concept of concrete and essential information, the omission of which may be able to alter the course of decision-making by the various users.
It is further dependent on the size and nature of an organization. Any material information is reliable, relevant, and complete, to offer decisions making with the help of it.