As a professional accountant, whether you know that in accounting, there is an important principle called the "principle of materiality" no? If the financial statements do not comply with the principle of materiality, it can lead to the wrong decision of users. So, principle of materiality in accounting what is? The effect of it how? The same Accnet find out the details in the article below.
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1. Principle of materiality in accounting what is it?
Principle of materiality is one of the basic principles in accounting. This principle stipulates that only those information can significantly influence the decisions of users of financial statements must be presented in that report.
Accordingly, the principle of materiality is defined in Clause 1, Article 22 of accounting Standards generic number 01 for that: "Information is considered critical when the missing or wrong of information that can impact on the economic decisions of users information".
2. Content of the principle of materiality in accounting
Principles important in the field of accounting (also called the principle Materility) put out that accountants should focus on collecting, processing, and provides information that matter. This is the information which if missing or incorrect can create significant deviations in the financial statements, directly influence the economic decisions of the users information.
The information is not important, are less affected or not significant for users can be ignored or synthetic on the item with the same quality or function.
For example: In the financial statements of A hotel, there are a number of items had content similarities were pooled on an item to create convenience and clarity.
- Such as, the account such as cash, bank deposits, money transfer, etc., may be combined into one item only is Cash and cash equivalents.
- Similarly, the account as raw materials, tools, merchandise, goods sent for sale,... can be combined into one item is inventory.
3. The impact of the principle of materiality in accounting to financial statements
- According to the principle of materiality, the important information will be given and presented in a way independent on the financial statements. For example, information related to money are considered as critical as it affects the solvency of the business. Therefore, the only goal "Cash and cash equivalents" usually reported separately to ensure the clarity and importance of this information.
- The information has properties similar will be pooled when presented on the financial statements. For example, items such as raw materials, tools, finished products, goods,... are all assets related to the operation, production and business. Therefore, they are usually integrated into one's "inventory" to make the report becomes easy to follow and effective.
From the angle of business apply principle of materiality in accounting help business save time and effort when preparing financial statements, especially when there is the ability to simplify recorded events and transactions is not important.
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4. The importance of the principle of materiality in business
- Compliance with principle of materiality will help to ensure that financial statements provide useful information, a full and honest, help users take the correct decision.
- Principle of materiality in accounting help prevent the presentation of the information is not significant in the financial statements, this may reduce the reliability of financial reporting.
- Principle of materiality allows business can be recorded simplified for the event, the transaction is not critical, this can help businesses reduce the cost of financial reporting.
5. The relationship between the principle of materiality and matching principle
Appropriate principles focus on ensuring that the revenue recognition and expense to go together. What this means is: When reporting a revenue accounts, the need to record an expense, respectively, related to the process of generating that revenue. This cost includes not only the cost incurred in generating revenue, which also includes costs from the previous period or the costs related to the sales of that.
However, when the appearance of conflict between the principle of materiality in accountingbusinesses can handle the following:
- Comply with the accounting standards or the relevant regulations.
- Weigh the benefits of the stakeholders and assess the degree of influence of the event.
- Refer to the opinion of experienced people in the field of accounting.
In this way, the business can ensure compliance and uniformity in the process of information processing, at the same time face and quickly resolved the conflict situation.
Principle of materiality in accounting requires the accountant to identify, report, the information can influence the decisions of users of financial statements. However, determining the level of materiality is not always easy, especially when businesses have to handle large amount of information, complex. Inaccuracy or omission of the factors that may lead to deviations in the report, seriously affect the decision of management.
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