Materiality

Introduction  

The materiality meaning could be a concept that defines how and why specific issues are important for a company or business. Let’s see what the meaning of the material is. By material, meaning the issue can have an impact on the financial or economic, reputational, and legal aspects of the business or on the system of internal and external stakeholders of that company. The purchase of paper, pencil eraser, and things like that are irrelevant to be mentioned in the financial book but buying machinery or selling of stock are large transactions that need to be mentioned in the financial statement.       

Materiality and Material Meaning: Explanation

The Concept of materiality in accounting refers to all the material items that should be properly reported in the financial statement. In simpler words, the concept of materiality is concerned with the events that have significance in nature and affect the assets and finance of the business.   Material meaning is related to the items or goods whose purchasing or selling decisions can be affected by certain changes in the users’ business information. 

The provisions of ignoring other accounting concepts are allowed by the materiality principle, ignoring the provisions doesn’t impact the financial statement. Thus, the information presented in the financial statement should have all the material information and be complete with it to present accurate business data. Shareholders, auditors, investors, etc., can be users of financial statements. Take an example to consider: if a company’s net asset is 800 crores and a defaulter failed to pay 500 rupees to a company, the default is immaterial to the company, whereas if the defaulter had failed to pay 50 crores, then it will have an impact on the company. The information that is insignificant to the business’s financial statement is termed as a non-material transaction, and these are usually very small or not impactful to affect the business. 

Materiality and other Accounting Principles  

The concept of materiality is very closely related to other accounting concepts such as:       

Relevance: The material information is regarded as relevant for accounting information to users as it impacts the company’s financial statements or business.

Completeness: The material information will be irrelevant to financial issues if it is not complete.            

Reliability: The material piece of information should be reliable and accurate, or else it can be misinterpreted. As important business decisions are made based on the material information, it has to be reliable. 

Materiality Concept in Accounting:

The materiality concept is frequently used in accounting for applying accounting standards. In the inaction of immaterial information in the financial statement, a company needs to apply the requirements of an accounting standard—minor transaction. A controller or auditor who is closing the book for the accounting period can ignore minor non-material transactions that do not have an impact on the financial statement. Materiality also helps in understanding and limiting the capital of the company by keeping an account of material items and non-material items. 

Conclusion 

The Concept of materiality in accounting refers to all the material items that should be properly reported in the financial statement. In simpler words, the concept of materiality is concerned with the events that have significance in nature and affect the assets and finance of the business. By material, meaning the issue can have a major impact on the financial or economic, reputational, and legal aspects of the business or on the system of internal and external stakeholders of that company. 

The material information is regarded as relevant for accounting information to users as it impacts the company’s financial statements or business. The material piece of information should be reliable and accurate, or else it can be misinterpreted. As important business decisions are made based on the material information, it has to be reliable.