With the help of an example, explain the materiality principle.
With the help of an example, explain the materiality principle.
According to this principle, only those transactions should be recorded which are material or relevant to the preparation of financial statements. All immaterial facts should be ignored. An information is a material if it has the ability to influence or affect the decision-making of various parties interested in accounting information, contained in financial statements.
According to the American Accounting Association (AAA), an item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor.
Example Rs.1,00,000 spent on advertising is material for a business having the turnover of Rs.3,00,000 whereas, it is immaterial for a business having a turnover of Rs.30,00,00,000.
According to this principle, only those transactions should be recorded which are material or relevant to the preparation of financial statements. All immaterial facts should be ignored. An information is a material if it has the ability to influence or affect the decision-making of various parties interested in accounting information, contained in financial statements.
According to the American Accounting Association (AAA), an item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor.
Example Rs.1,00,000 spent on advertising is material for a business having the turnover of Rs.3,00,000 whereas, it is immaterial for a business having a turnover of Rs.30,00,00,000.
