CA Foundation · Accounting · Theoretical Framework
Under the accounting convention of materiality, which of the following treatments is most appropriate for a large retail chain?
Expensing a ₹10 pencil purchase immediately is the appropriate treatment. Under the materiality convention, insignificant items need not be tracked in detail, whereas large items such as a ₹5 crore sales return must be fully recorded and disclosed.
- ARecording a ₹10 pencil purchase as an expense instead of as stockCorrect
- BIgnoring a ₹5 crore sales return because it is a one-off event
- CRecording personal expenses of the owner in the firm's books
- DShowing a fall in stock value only when the stock is actually sold
Explanation
Materiality allows insignificant items to be treated simply, so a ₹10 pencil can be expensed immediately rather than carried as stock. A ₹5 crore return is material and must be recorded. Personal expenses violate the business entity concept, and delaying stock write-downs conflicts with conservatism.
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