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The Materiality Concept

• Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements

• Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor

ILLUSTRATION

Company A bought 6 months supplies of stationery costing $600.

Question: Should the company spread the cost of this stationery for 6 months by expensing off $100 per month to the Income Statement ?

Answer : Based on this concept, as the amount is so small or immaterial, it can be expensed off in the current month instead of tediously expensing them for the next 6 months