Materiality concept is associated with the principle of full disclosure. According to full disclosure principle, all material information should be disclosed in the financial statements. Materiality depends on the relevance and reliability of information. Also Materiality refers to what is significant and what is insignificant.
According to this concept, any information would be shown in detail in financial statements only when the same is useful to the users of such information, while immaterial information may not be disclosed, e.g., Instead of preparing separate accounts for items like pen, erasers, rough writing pads, pencil, etc., only one account styled as ‘Stationery Expense Account’ shall be maintained.
Examples:
- Instead of preparing separate accounts in factory for small tools like small hammers, nails, screws, screwdrivers, etc., only one account of ‘Loose Tools Account’ shall be maintained.
- Purchase of dustbin for ₹ 45 should be considered as an expense instead of considering the same to be a fixed asset.
- Instead of charging expenses of only partly used notebook (pad), full cost of notebook (notepad) is charged as expense to Profit and Loss Account even if the part thereof is still unused.
- Any item of income or expenditure which does not exceed 1 % of the revenue from operations or ₹ 1,00,000, whichever is higher is not required to be separately shown in statement of Profit and Loss of a company unless specifically mandated otherwise.
- If accounting year ends of 31st March, 2017 and a Electricity bill is received for the period of 3-3-’17 to 02-04-’17, entire value of this bill may be charged as expense to Profit and Loss Account for the period ended 31st March 2017 instead of charging expense for two day in the year 2017-18.
