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CA Foundation · Accounting · Theoretical Framework

Desai Ltd. has paid ₹3,000 for a stapler, which will last for several years. The firm records it as an expense of the year rather than as a fixed asset, as the amount is insignificant. Which statement best justifies this treatment?

The materiality convention justifies the treatment. Because ₹3,000 is insignificant and cannot influence users' decisions, it can be charged as an expense instantly even though the stapler lasts several years. Conservatism, consistency and accrual do not support expensing assets purely for being small.

  1. AMateriality convention: insignificant items need not be treated strictly, as they do not influence decisionsCorrect
  2. BConservatism: all purchases should be treated as expenses when in doubt
  3. CConsistency: assets must be expensed in the year of purchase
  4. DAccrual concept: the stapler benefits only the current year

Explanation

Materiality allows items too small to affect users' decisions to be expensed immediately even though they have a long life. Conservatism concerns anticipating losses and not ignoring asset status for small items. The accrual concept would in fact spread the cost over multiple years if the item were significant, and consistency does not require expensing assets.

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