The concept of materiality is an underlying principle of fin

The concept of materiality is an underlying principle of financial reporting. a. Briefly explain the concept of materiality. b. Is $2,500 a \"material\" dollar amount? Explain. c. Describe two ways in which the concept of materiality may save accountants\' time and effont in making adjusting entries.

Solution

a. The materiality principle says that a company can ignore accounting standard if the net impact of this has such a small impact on the financial statements that a reader of the financial statements will not be misled.

b. It can be material or immaterial based on size of financial statement so it is necessary to exercise judgment while deciding if transaction is material.

c. First, suppose you pay $ 600 rent for some place in advance for next 6 months. This can be charged to expense at one go instead of deferring expenses to be charged in next 6 months. It will save time of accountant who need not now keep record of balance in account at every month end close.

Second, capital items purchased of small value (like chair) can be expensed off immediately instead of first capitalizing it and then charging it to expenses as depreciation. It saves a lot of time of accountant in keeping the records of depreciation.