Accounting information is “material” if its omission or misstatement would mislead investors. In other words, if there’s a piece of information that investors need to know, then that information is material – it makes a difference.
Information can be material in size or importance. In size, materiality is all about the amount. A large amount of money – relative to the size of the company – is material. A small amount of money – relative to the size of the company – is not material. For example, some companies round their financial statement figures to the nearest thousand dollars (or even million dollars). They state a $500,000 expense as $500 “in thousands.” These companies do not consider amounts less than a thousand dollars to be material.
Some items may be small in amount, but large in importance. For example, suppose that the president of the company had a $500 expense which in dollar amount was not material. What was the expense? He bribed a public official. Since this expense is illegal, it is considered material, even though the amount itself is not material.
Why is materiality important? Because accountants don’t want to bring on investor overload. Too much immaterial information would swamp investors with data that would confuse them and distract them from the truly important information.