What is materiality

What is materiality?

Materiality is a concept related to preparation of financial statements. An item is said to be material if user decision making may be effected by its omission or misrepresentation.

Normally there are two things which determine the materiality size and nature. Some time size alone make an item material and in other case nature alone make an item sensitive for materiality consideration and famous example of nature is entertainment expense.

Materiality is a very subjective thing and cannot be decided in isolation. An amount of 5,000 is material or not cannot be decided unless you are given a profit of the organization. It can be material if the organization has profit of 10,000 because the item is 50% of profit but it would be immaterial if organization has an profit of 500,000 because in this case it is only 1% of profit.