In plain English
For a small business a few dollars rarely matters, but a few thousand might. Set a threshold for accruals and corrections.
Ask your preparer for guidance.
Why it matters
Not every small difference is worth hours of work. Materiality gives you a sensible line for when to chase an error, record an accrual or redo a report. Without one, owners either agonize over pennies or wave off amounts that really do change the picture.
The line depends on the size of the business and who is reading the numbers. A lender, a buyer and a tax preparer may each care about different amounts.
Worked example
You may ignore accruals under a few hundred dollars but always record a $5,000 bill.
How to handle it
- Agree on a working threshold with your accountant for accruals and corrections.
- Write the threshold into your month end checklist so it is applied the same way each time.
- Record items above the line and note small items below it that you chose not to adjust.
- Revisit the threshold when the business grows or when a lender starts relying on your statements.
Common mistakes
- Ignoring many small errors of the same type because each is minor, when together they add up to a real distortion.
- Applying materiality to tax reporting, where small amounts still need to be reported correctly.
- Using one fixed dollar amount for years while revenue grows several times over.
Not the same as: Cutoff
Cutoff decides which period an item belongs to. Materiality decides whether an item is large enough to be worth adjusting in the first place. See Cutoff.
Go deeper
- Accrued Expenses and Accrued Revenue Explained: Understand accruals: how to record expenses you owe but have not been billed for, and income earned but not invoiced, with simple examples.
Related terms
- Net income: What is left of revenue after all expenses, including cost of goods sold and taxes where recorded.
- Net margin: Net income as a percentage of revenue.
- Liability: An amount the business owes to others.
Common questions
What is materiality?
The size at which an error or omission would change a reader's decisions.
Can you give an example of materiality?
You may ignore accruals under a few hundred dollars but always record a $5,000 bill.
Is materiality only a concept for audits?
No. Auditors use it formally, but any business can use the idea to decide which bookkeeping issues to fix now and which can wait.
Can something small be material?
Yes. An amount can matter because of what it is, not its size, such as an owner expense mixed into the business or an error that flips a profit into a loss.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.