Hi people,

Need some help on the following terms, have tried googled it, but still not really able to understand the whole meaning on most of the articles read

1)

What is meant by an "immaterial item"? Any suitable detailed examples on it?


2)

Historical cost accounting isn't able to truly represent the affair of the business entity it's reporting. What's Historical cost accounting and the possible reasons for such a view?

1)

Let's say my company has assets of 100 million, Liabilities of 60 million and equity therefore of 40 million.

Also, let's say that in 2006, I had 48 million in sales, 28 million in expense and therefore a net income of 20 million.

Now, if I tell you that there was a mistake in the 2006 income statement and I debited my supplies expense by $100 and not the $300 I was suppose to, would you care?

That mistake means I undervalued my expenses by $200 and overstated my net income by $200.

With a net income of 20 million dollars, is $200 worth your time and aggravation? Is it material?


Materiality basically means is a number relevant to the overall scheme of things.

Do I really care about this number? Will it change my overall view of this company or what these statements are telling me?

If yes, it is material.

If no, it is immaterial.



2)

Historical cost accounting means you record assets at their historical cost (the cost you paid for them).

For example. In 1990, I bought a building for $150,000.

All throughout the 1990's and up to today (2007), my balance sheet reflects my building at a cost of $150,000 (less some accumulated amortization).

Even if today, 2007, the building is worth $800,000, I still show it on my balance sheet at the historical cost, $150,000.

Why?

Because who is to say it is worth $800,000 today until I actually sell it. Maybe it is only worth $600,000.

Historical cost accounting provides consistency among company's balance sheets.