What Is The Materiality Principle In Accounting

When it comes to financial statements for your business, there are likely some expenses that you neglect to put on the balance sheet or appropriately spread out over the life of their usage. For example, suppose you run out of paper clips and you pay five bucks at a local store for a box that will hold you over until your next shipment of office supplies comes in. Maybe you paid cash and forgot to ask for a receipt. You might feel like it’s not even worth the bother of putting it in the books (the amount of time required is cost prohibitive, in other words). FMD Singapore will manage the financial systems with the skills and expertise. The recording of the transactions at the book will offer the best results to the individuals. The running of the paper clips is with the excellent of the accountants. The usage is for the life-time to deliver the best results. 

Or suppose you prepay a small amount on phone service for an employee and the coverage is spread out over the next several months. If it falls into two financial quarters you should be splitting the expense in the books, but you may decide to simply list the entire amount in the current quarter rather than wasting additional time to enter it out accordingly. The point is, as a business owner you will sometimes find yourself dealing with the issue of material versus immaterial costs and if you want to remain in compliance with financial legislation you need to fully understand the materiality principle.

This principle centers mainly on the size and scope of any entries made in your financial records that are incorrect or even omitted. Those that are “small” may be overlooked while significant omissions or false entries could land you in legal hot water. But how do you know where to draw the line? Since there is no specific dollar amount assigned to entries to clarify, you might not be certain. And in most cases it is up to your discretion as a competent adult and business owner. But there are some guidelines that should help you to determine whether a particular expense or statement is immaterial, and therefor allowed to be omitted, or if your incorrect balance sheet represents an actionable offense that could lead the Securities and Exchange Commission (SEC) to come after you.

In most cases you will know. For example, a small business owner might consider an immaterial expense to be anything under $100 (like a corporate lunch, for example) while a multi-billion dollar corporation might feel the same way about dropping $100,000 on wining and dining the media. Why any company would want to omit such an expense from the balance sheet is their concern, but in most cases they’re the only ones who lose by doing so. Of course, if you do this too often on the company dime it could come back to bite you (since even small expenses can add up to major value). The real problem, as far as authorities are concerned, is the failure to properly list major expenses that could have an impact on a company’s financial statement to the degree that it changes a net profit to a net loss, just for example.

Basically, if an omission or misstatement is found to change the company’s balance sheet such that it affects their industry standing (potentially leading to a favorable situation for the company where lenders, insurance providers, and so on are involved that would not have existed otherwise) the SEC will not take kindly to it. The general rule of thumb is that any amount at or above 5% of a company’s total assets must be considered material and listed on the balance sheet (that includes any number of immaterial expenditures that total 5% or more). In truth, you’re better off just operating on the up and up by recording everything down to the last penny; it’s the best way to stave off an audit or subsequent legal issues.

Patrick

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Patrick is a part-time fitness trainer and pursuing his Master’s in American Literature from Stanford University. He wishes to share his fitness plan with others to help them achieve their goals in terms of fitness and education.