Accounting Online Program Certification Practice Test

Which of the following represents a violation of the principle of materiality?

1. Not reporting a transaction under £1,000

2. Reporting a transaction with a significant impact on financial statements

3. Including all receipts regardless of amount

4. Failing to disclose non-material transactions

The correct answer is: Not reporting a transaction under £1,000

The principle of materiality in accounting stipulates that all information that could influence the decision-making of users of the financial statements should be reported. This implies that insignificant information can be omitted without affecting the overall understanding of the financial position of the entity. Choosing not to report a transaction under £1,000 is a violation of the principle of materiality if that transaction, even though it appears small, could influence the decisions of financial statement users. In general, thresholds for materiality are often established by organizations, and anything falling below this threshold is typically considered immaterial and can be omitted. However, if a significant number of small transactions accumulate to the point that collectively they could impact the decisions of a user, then failing to report even a seemingly minor transaction may not adhere to the principle of materiality. In contrast, reporting a transaction that has a significant impact on the financial statements aligns with the principle of materiality, as such reporting is crucial for users to make informed decisions. Similarly, including all receipts regardless of amount may seem excessive but does not inherently violate the principle, as it emphasizes transparency. Failing to disclose non-material transactions does not violate the principle either, as these transactions typically have no significant effect on the financial statements. Thus, the correct