However, the combined effect of fifteen items may be material when seen together.Materiality depends on the dollar amount as well as nature of the item or event. It helps auditors to focus their attention on the areas where the material errors or omission may occur. Materiality is a concept in financial accounting and reporting that firms may disregard trivial matters, but they must disclose everything that is important to the report audience. There is no rule of thumb available to determine the materiality of an amount. For example, a company may charge its telephone bill to expense in the period in which it is paid rather than in the period in which the telephone service is used. Relatively large amounts are material, while relatively small amounts are not material (or immaterial). Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the users. Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the entity.Materiality is relative to the size and particular circumstances of individual companies.A default by a customer who owes only $1000 to a company having net assets of worth $10 million is immaterial to the financial statements of the company.However, if the amount of default was, say, $2 million, the information would have been material to the financial statements omission of which could cause users to make incorrect business decisions.If a company is planning to curtail its operations in a geographic segment which has traditionally been a major source of revenue for the company in the past, then this information should be disclosed in the financial statements as it is by its nature material to understanding the entity's scope of operations in the future.Materiality is also linked closely to other accounting concepts and principles:ABC LTD has been sued by XYZ LTD for $10 million as damages for breach of contract. Some important factors are discussed below:Materiality refers to importance of a specific item in relation to other items on the financial statements and largely depends on the size of the organization. For example, each of fifteen items may be immaterial when considered by itself. Determining materiality requires professional judgement. For instance, a $20,000 amount will likely be immaterial for a large corporation with a net income of $900,000. This fact would be considered important even if the amount of stolen money is very small in relation to other items of the financial statements. Materiality in accounting relates to the significance of transactions, balances and errors contained in the financial statements. The Materiality Concept The manner in which a company accounts for a transaction can have a material effect on the usefulness of financial statements to the documents’ readers.

Suppose, for example, some managers are involved in stealing money from the company. The materiality concept of accounting stats that all material items must be properly reported in financial statements. In accounting, materiality refers to the relative size of an amount. Several factors are considered to decide whether a particular item is material or immaterial. However, most of the accountants consider an amount immaterial if it is less than 2 or 3 percent of net income.For assessing materiality of an item, accountants not only take into account the individual amounts but also the cumulative effect of all immaterial amounts. An item is considered material if its inclusion or omission significantly impacts the decision of the users of financial statements. For example, an expenditure of $500 may be material in relation to other financial statement items of a small business but immaterial to the financial statement items of a large corporation like Sony, Samsung, Northern Tools and General Electric.

Materiality Principle or materiality concept is the accounting principle that concern about the relevance of information, and the size and nature of transactions that report in the financial statements. Items that are important enough to matter are material items. The concept of materiality in accounting is very subjective, relative to size and importance.