CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions
Anand Enterprises purchased a waste-paper basket for Rs 150 and charged the entire amount to the Profit and Loss Account as an expense instead of capitalising it as furniture, even though it will last several years. Which convention justifies this treatment?
The treatment is justified by the convention of materiality. Rs 150 is too insignificant to affect the decisions of users of the financial statements, so it can be expensed immediately rather than capitalised and depreciated over several years.
- AMaterialityCorrect
- BConsistency
- CConservatism
- DMatching
Explanation
The amount is so insignificant that capitalising and depreciating it would not influence the decisions of users of the statements. Ignoring the strict classification for trivial items is justified by the convention of materiality. Conservatism relates to anticipating losses, not trivial items.
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