Materiality Concept in Accounting
The main aim of the preparation of monetary statements is to enable the top users of the financial statements in making informed decisions. Thus, all such information which has the ability to affect the top user’s decisions is material in nature and must be disclosed in the financial statements.
The decision of whether information has relevance or not involves a component of judgment. This depends on two factors i.e. the amount involved or the importance of the event.
Materiality Concept in Accounting – Examples
XYZ Ltd Company is involved in the exploration of gold mines in Zambia, the government of Zambia has passed replacement legislation that will place a ban on the export of gold from the country which will seriously jeopardize the longer-term prospects of the company. In such a case, this being material information shall be disclosed in the financial statements of XYZ Ltd.
The remuneration paid to the administrators and key employees shall be disclosed in the financial statements as this is a material figure for various stakeholders.
the varied accounting policies employed by organizations must be disclosed in the financial statements in order to enable a better understanding of the financial position of the company.
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According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”
After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.
After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual