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Materiality Concept in Accounting

What is Materiality Concept?

Materiality concept in accounting refers to the concept that all the material items should be reported properly in the financial statements. Material items are considered as those items whose inclusion or exclusion results in significant changes in the decision making for the users of business information.

Materiality concept also allows for the provision of ignoring other accounting principles if doing so doesn’t have an impact on the financial statements of the business concerned.

Therefore, the information present in the financial statements must be complete in terms of all material aspects, so that it is able to present an accurate picture of the business.

The users of financial statements can be shareholders, auditors and investors, etc.

Example of Materiality Concept

A customer who has defaulted in payment of Rs.100 to a company that has a net assets of 5000 crores is regarded as immaterial for the company. However, if the default amount is Rs. 200 crores, then it will have an impact on the company.

Relation with other accounting principles

Materiality concept is closely related to the other accounting principles, such as

1. Relevance: Material information impacts the financial decisions taken by users and is therefore regarded as relevant to the users of accounting information.

2. Reliability: If a significant piece of information is omitted or misrepresented, it will result in impairment of users capability to make important decisions based on the financial statements. It will impact the reliability of the information.

3. Completeness: If the financial statements contain incomplete information, then it will not present the business information correctly.

This was all about the topic of the Materiality concept of accounting, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to CoolGyan’S.