Have you read some financial statement before? You will find a wealth of information in those sheets, but there are certain terms and techniques that can be disregarded if it has a small impact on its final outcome. That principle is known as Materiality in accounting.
Bookkeeping services in Malaysia know exactly how to create valid and precise financial statements and in this article, I will talk about Materiality and why it is important in the field of accounting.
What is Materiality?
Bookkeepers and accountants will be the ones to create financial statements for the company. Materiality, then, is the omission of certain entries on the financial statements. The information is said to be ‘material’ if its removal from the financial records might influence the judgment of anyone who looks on the data that is presented to them.
The business operations, the nature of the item, and its inherent monetary value may influence the materiality of the data that is presented in the financial statements.
Why is the Concept of Materiality Significant?
Suppose that there is a transaction, whose amount is quite small or is relatively inconsequential to the operations of the business, then the company owner may deem the information immaterial.
For data that is considered immaterial, the company owner may forego previously used accounting methods that are suggested by the GAAP and may instead use a more expedient method to help account for the said transaction.
It is important for you to know that a business’ threshold for materiality differs from company to company and it may vary over a period of time.
How is the Materiality Concept Applied?
If on a certain transaction, the cost of acquiring assets is quite low, then the company may depart from the principles set by the Generally Accepted Accounting Principles or GAAP.
For instance, if a particular asset’s useful life can extend beyond the current accounting period, then the principle requires the company to report the asset’s costs in the balance sheet within the current accounting period. Subsequently, the payment of these costs should be done during the asset’s useful life.
However, if we look at small things such as a stapler, for example, then the cost of such asset is deemed as immaterial and may be omitted from the financial books.
What is the Effect of the Concept of Materiality in a Business Setting?
You could say that Materiality is more of a subjective concept because it allows a company to disclose only those transactions that are deemed sufficient enough to make a huge difference in the company’s financial statements.
If the concept would be practiced, the company must account for any substantive amounts in a way that complies with the standards and principles set by the GAAP and other financial accounting principles.
Just remember that Materiality, in this sense, is measured in terms of the dollar amount of a particular item and the nature of the omission that results if the accounting principles are not followed.