Chapter 04 - The Accounting Cycle: Accruals and Deferrals
(A.) Identify several factors considered by an accountant in deciding whether an item is
(B.) Does the concept of materiality complicate or simplify the process of making adjusting
entries? Give an illustration to support your answer.
(A.) Factors to be considered include the following:
The dollar amount of the item (relative to annual net income, for example).
The cumulative effect of all items under consideration.
The nature of the item (politically sensitive, illegal, contrary to company policies, etc.).
Accountants use their professional judgment in deciding which items are material, i.e., might
reasonably influence the decisions of users of the financial statements.
(B.) The concept of materiality should simplify the adjusting process because it allows
accountants to use estimated amounts and even to ignore other accounting principles if the
results do not have a "material effect" upon the financial statements. Several examples are
Low-cost assets may be charged directly to expense.
Some expenses such as utilities are charged to expense as the bills are paid, rather than when
services are used, even though this practice technically violates the matching principle.
Some adjusting entries may be ignored for immaterial dollar amounts.