Managing Materiality

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.

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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? She 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 overload investors with too much information that would confuse them and distract them from what is most important.

Entrepreneurs need to remember not to sweat the small stuff – focus on that portion of your business that generates the most return, and don’t waste too much time on tasks that add little or no value.

3 thoughts on “Managing Materiality

  1. Greetings Professor and Accountinator and super good accounting teacher that is a most excellent teacher !!!
    I just found your site after looking around for weeks on learning about accounting and bookkeeping. Your site and spreadsheet are very very good. Thanks !!

    If a person is told by someone that the errors in the CPA’s tax return are deminimus does that mean that the client should not worry about it ?
    Is deminumus the same as not material ?
    If the client tells her CPA the numbers on the tax return you prepared for me are different than what I gave you to put on the tax return is that a something the client should be concerned about if her accountant says the numbers are deminimus. Just sign the return so I can file it for you.
    Should the client be content with that CPA or should she start looking for another CPA ?
    If so how should she figure out how to tell if a CPA is the perfect fit for her and her business ?
    Thanks so much,
    P.S. if you want to break this into different articles please go ahead
    I wish you would do a post along the lines of : You know it is time to start looking for a new CPA when and then you fill in the blank .

    Here is one. You know it is time for you to start looking for a new CPA when he ask you if can he sleep on your couch for a few days because his mother kicked him out of the basement.
    when he says he is thinking about quitting being a CPA because if he had it to do over he would have chosen a different job.
    when he wants to borrow your car keys.
    when he wants to borrow some money from one of his clients.
    when he files for an extension for you without asking you if you want him to.
    when he gets arrested for shoplifting pencils and paper clips
    when he gets arrested for embezzelment
    when the board of registration in his state revokes his license.
    when he ask you if he can borrow your adding machine
    when he asks you if you mind if he only works 1 day a week, even though he said he had to file an extension for you because he is too busy to get to you.
    when he says, what is a Health Savings Account ?
    when he ask you to buy an insurance policy from him that pays him more money and does not hold him “accountable” if he messes up your tax return !!

    Please keep on keeping on !! I will tell lots of people about your great site.

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