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 and therefore material. 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.