Materiality Concept

The Materiality Concept is a practical constraint on the full application of accounting principles. It says that accounting should focus only on material facts — information that matters to a user making a decision. Efforts and resources should not be wasted recording and presenting trivial details that have no real impact on the determination of income or the financial position of the business.

What makes a fact material? Two factors decide this: the nature of the fact and the amount involved. A fact is material if a reasonable, informed user of financial statements would change their decision if they knew about it. For example, spending money to add a new screen to a theatre is material because it increases the future earning capacity of the business. Similarly, a change in the method of depreciation, or a liability that is likely to arise soon, are both material facts. All such information must be disclosed in the financial statements and the accompanying notes so that users can make informed decisions.

The reverse side of this concept is equally important. When the amount involved is very small, strict adherence to accounting principles is not required. The classic example given in the book is stationery — items like erasers, pencils, and scales. These are not shown as assets in the balance sheet, even though they are technically assets that will be used over time. Instead, whatever amount of stationery is bought in an accounting period is treated as an expense of that period, whether it has been consumed or not. The amount spent is treated as revenue expenditure and taken directly to the Profit and Loss Account of the year in which the expenditure is incurred.

The accounting treatment is straightforward: …