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Materiality Principle

Materiality principle is the principle of basic accounting which gives us the direction for making better financial statement. As per the material principle, accountant should include all the items in the financial statements which affect the users for taking their important decisions. As per this principle, there is no need to show all insignificant and irrelevant items in the financial statement.


Benefit of Using Material Principle 

  1. With this principle, our financial statement shows only important items and our users can use it easily without wasting time for searching important information. 
  2. Accountant can help of this principle for making financial statement fastly because it gives freedom to merge small and unimportant items with important items for bringing material results.

Examples of Materiality Principle 

For showing the examples of material principle, we have to explain that it is on the business which will fix whether an item is material for him or not. We can also compare it with human nature. There are lots of tensions which effect different person with different way. For one person, it is immaterial because that one person is so positive and live in the today life. For other person, it may be material because that other person is so negative and he will be living his future life by taking future tensions day and night. Like this, accountant has decide whether item is material for his company or not. 

1. For example, a person came the office for meeting with any company's employee. Accountant will give one glass of milk. It cost is few cents. It is immaterial, it is better to record it in rough page and show total cost of milk of month as single entry in cash book when you will pay the monthly bill. 

2. A company whose debtor has paid $ 400 million. This is so material if he do not give his debt of $ 400, it will lose of capital which invested by shareholders. But because he paid this big amount one time, he had given $ 1000 less. So, to show this loss as bad debt is total immaterial because we have other options also. We can show it cash discount by merging it annual cash discount. 

3. A small company has paid for tools, it will be his fixed asset but a large company who buys tool every month and again buys tool for next month, to show tools as fixed asset for large company will totally immaterial. For, large company, we can easily close the account by transferring annual tool expense in profit and loss account's debit side because large company is using tool and for keeping update the machine, it is necessary to buy new tools every month. 

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Accounting Education: Materiality Principle
Materiality Principle
Accounting Education
http://www.svtuition.org/2013/10/materiality-principle.html
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