Question

What is an example of materiality?

Answer 1

Materiality is one of the important accounting principles and it can be defined as the judgement made as to whether a item or an item amount is significant enough to influence decisions of the decision makers i.e. users of the financial statements.

For example, a company with a net income of $1 million and sales worth $10 milllion and assets worth $20 million, recognized sales of $0.5 million even when the sales did not meet the revenue recognition criteria. This is material because it accounts for 5% of its sales. The financial statements have to be adjusted to reflect the true figures as the sales amount of $0.5 million is material enough to reasonably influence the decisions of the users.