Materiality Principle – What is the materiality principle?

The materiality principle expresses that a company may violate another accounting principle if the amount in question is small enough that the financial statements will not be misleading

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The materiality principle outlines that accountants are required to follow generally accepted accounting practices except where it makes no difference if the rules are ignored and when doing so would be exceedingly expensive or difficult.

Under the materiality principle, if another accounting principle is ignored, then the net income of the company must not be significantly affected and the financial statements cannot be impaired.

The point of the materiality principle is that if an amount or transaction is immaterial in the grand scheme of the company, then it may not need to be treated in the same manner as material transactions.

Material vs. immaterial

One example of an immaterial accounting instance would be the expensing of a £20 table that has a useful life of ten years.

Another accounting principle – the matching principle – would require that the company record the table as an asset and then depreciate its cost over the 10 year useful life.

The materiality principle in turn says that you may expense the whole £20 the year that the table is purchased however – so you do not have to depreciate the table by £2 over each of the next ten years.

This is because the materiality principle notes that investors, creditors, and other interested parties will not be misled by the immediate expensing of the £20 table.

How to determine materiality

Determining what is a material or significant amount can require professional judgment. This is because while £5,000 may be considered an immaterial amount for a multinational corporation, it could be considered a very material amount for a small business.

Materiality is not only concerned with the monetary amount of an item, but also with the nature of the item in question. Many other factors, including whether the item in question involves an unlawful transaction, should also be considered when determining materiality.