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What is the Materiality Principle?The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a user of the statements would not be misled. Under generally accepted accounting principles (GAAP), you do not have to implement the provisions of an accounting standard if an item is immaterial. This definition does not provide definitive guidance in distinguishing material information from immaterial information, so it is necessary to exercise judgment in deciding if a transaction is material. The Securities and Exchange Commission has suggested for presentation purposes that an item representing at least 5% of total assets should be separately disclosed in the balance sheet. However, much smaller items may be considered material. For example, if a minor item would have changed a net profit to a net loss, then it could be considered material, no matter how small it might be. Similarly, a transaction would be considered material if its inclusion in the financial statements would change a ratio sufficiently to bring an entity out of compliance with its lender covenants. The materiality concept varies based on the size of the entity. A massive multi-national company may consider a $1 million transaction to be immaterial in proportion to its total activity, but $1 million could exceed the revenues of a small local firm, and so would be very material for that smaller company. The materiality principle is especially important when deciding whether a transaction should be recorded as part of the closing process, since eliminating some transactions can significantly reduce the amount of time required to issue financial statements. It is useful to discuss with the company's auditors what constitutes a material item, so that there will be no issues with these items when the financial statements are audited. Example of the Materiality PrincipleAs an example of a clearly immaterial item, you may have prepaid $100 of rent on a post office box that covers the next six months; under the matching principle, you should charge the rent to expense over six months. However, the amount of the expense is so small that no reader of the financial statements will be misled if the entire $100 is charged to expense in the current period, rather than spreading it over the usage period. In fact, if the financial statements are rounded to the nearest thousand or million dollars, this transaction would not alter the financial statements at all. Terms Similar to Materiality PrincipleThe materiality principle is also known as the materiality concept. This preview shows page 1 - 3 out of 4 pages. 5. Which of the following is correct about double entry system of accounting?A. Every business transaction brings at least two financial changes in business.B. Financial changes are recorded as debits or credits in two or more accounts.C. Every debit entry has a corresponding credit entry.D. All of the above 6. According to accrual concept of accounting, financial or business transaction is recordedwhen: Get answer to your question and much more 7. Which of the following states that a transaction is not recorded in the books of accounts unless itis measurable in terms of money? Get answer to your question and much more 8. Sony, a multinational electronics corporation, rounds dollar amounts in its financial statements tothe nearest $1,000. Which accounting principle/concept justifies this action? Get answer to your question and much more 9. The auditor noticed that the financial statements of Meta Company were missing some footnotesimportant for users for decision making. This action of the management is a violation of:A. Materiality conceptB. Going concern conceptC.Economic entity conceptD.Full disclosure concept Upload your study docs or become a Course Hero member to access this document Upload your study docs or become a Course Hero member to access this document End of preview. Want to read all 4 pages? Upload your study docs or become a Course Hero member to access this document Which of the following states that a transaction is not recorded in the books of accounts?If transactions are not recorded in the books of account as per fundamental rules of accounting, error is said to be error of principle.
Which of the following states that a transaction is not recorded in the books of accounts unless it is measurable in terms of money * 1 point?The correct answer is OPTION C: Money Measurement Concept.
According to the concept of money measurement, only those processes and events in an organization that can be expressed in money, such as the sale of goods, payment of expenses, or receipt of income, should be documented in the book of accounts.
Which accounting concept or principle states that the transactions of a business must be recorded separately from those of its owners or other businesses Mcq?This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity. Was this answer helpful?
Which of the following states that a transaction is not recorded in the books of accounts unless it is measurable?The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money.
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Which of the following states that a transaction is not recorded in the books of accounts unless?
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