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January 8, 2009

What is materiality?

In accounting, the concept of materiality allows you to violate another accounting principle if the amount is so small that the reader of the financial statements will not be misled.

A classic example of the materiality concept or the materiality principle is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.

Determining what is a material or significant amount can require professional judgment. For example, $5,000 might be immaterial for a large, profitable corporation, but it will be material or significant for a small company that has very little profit.

Learn more about Accounting Principles.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

11 Responses to “What is materiality?”

  1. long on February 5th, 2009 9:08 am

    what is the difference between allowance method writing off and direct writing off method of accounting for noncollectable recievable

  2. Fakhr on March 15th, 2009 11:38 pm

    Good morning Sir,
    sir what mean debit & credit

  3. arshad on March 28th, 2009 8:23 am

    DABIT
    increased in asset and decreased in liability.
    CREDIT,
    decreased in asset and increased in liability

  4. miera_91 on August 12th, 2009 1:42 am

    sir,what mean of accounting constraints(materiality)???

  5. bill on September 14th, 2009 7:25 pm

    ARSHAD- NO! DEBIT means the left side, and CREDIT means the Right side of the entries. it all depends on the situation of your entry, differnt situations debits and credits mean different things.

  6. mmmadt on September 23rd, 2009 1:42 am

    oh god, now i could understand this concept! really helpful, thank you!

  7. maria on October 8th, 2009 8:05 pm

    what does it mean if accounting information has predictive value, it is useful in making predictions about what? Is it the future IRS audits, a new accounting priciples, foreign currency exchange rates, or the outcomes of past, present, and future events of a company.

  8. maria on October 8th, 2009 8:19 pm

    what is the individual assets invested by a partner in a partnership?

  9. fari on October 15th, 2009 10:39 pm

    what is materialty concept give me example?

  10. sherry on October 19th, 2009 4:37 am

    what is materiality concept? also give its examples

  11. Lala on October 29th, 2009 5:10 am

    Materiality concept is : We can call an item as a material if it is omission or misstatement and would effect the decision of the user.

    For the example : A small company buy an asset which is cost $ 1000. Since this asset belong to small company, they can consider it as a material. And they may charge the depreciation for this asset.
    But in a big company, they may call it immaterial and they just need to expense it away, because the price is cheaper than another asset.

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