Materiality

There is almost unlimited amount of financial information which can be provided for any business enterprises. But in order to make financial statements more meaningful and to minimize costs, accountants should report only information which is material. Materiality is an implicit guide or the accountant in deciding what should be disclosed in the financial statements. There is however some difficulty in defining materiality stress the role of accountant’ judgment in interpreting what is and what is not material, while at the same time stressing its importance. “Materiality is essentially a matter of professional judgment. An individual item should be judged material if the knowledge o that item could reasonably be deemed to have influenced the users of the financial statements.” The essence of, materiality is, therefore, relative importance in respect of following two matters:

(i)    Materiality of information to be supplied by the financial statements.

(ii)    (ii) Materiality of amounts.

Materiality of information:

The materiality convention signifies the relative importance. Thus an item may be important from the point of view of one user while it may be insignificant for others users.

Materiality of amounts:

Accounting procedures require effort and cost money. The accountant does not attempt to record the amounts of those items which are so insignificant that work of recording involves more cost than benefit. Pencils, Papers, sharpeners, etc., are treated expenses when they are acquired although technically they are assets of the company.

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