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Difficulty: MediumAccounting Concepts and Conventions

A firm purchased office paper clips, staplers, and wastebaskets for N4,500\text{N}4,500. Although these items will be used for several accounting periods, the accountant immediately charged the entire amount as an expense in the profit and loss account instead of capitalizing them as non-current assets. Which accounting convention justifies this accounting treatment?

  1. MaterialityAnswer
  2. B
    Business Entity
  3. C
    Going Concern
  4. D
    Consistency

Answer

Materiality
The materiality convention states that accounting rules need not be strictly enforced for items whose monetary value is so small that treating them strictly (capitalizing and depreciating them) would be impractical and useless to decision-makers. Charging the N4,500\text{N}4,500 stationeries directly to the profit and loss account is therefore fully justified under materiality.

Step-by-Step Solution

1
Analyze the nature of the transaction and the asset's relative monetary value.
The purchase consists of low-value administrative items totaling N4,500\text{N}4,500.
Although these items last beyond one accounting period, tracking and depreciating small items over several years incurs administrative costs that outweigh the accounting benefit.
2
Identify the governing accounting rule for handling low-value items.
The materiality convention states that financial statements need only reflect information that is significant enough to affect user decisions.
Expensing low-value items immediately simplifies financial record-keeping without distorting the true financial position of the enterprise.

Key Concept

Materiality Convention
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Topics

Accounting Concepts and Conventions

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