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immaterial items in a theoretically incorrect manner simply because it is more convenient and less expensive to do
so. For example, they may debit the cost of a wastebasket to an expense account rather than an asset account even
though the wastebasket has an expected useful life of 30 years. It simply is not worth the cost of recording

depreciation expense on such a small item over its life.
The FASB defines materiality as "the magnitude of an omission or misstatement of accounting information that,
in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on
14
the information would have been changed or influenced by the omission or misstatement". The term magnitude in
this definition suggests that the materiality of an item may be assessed by looking at its relative size. A USD 10,000
error in an expense in a company with earnings of USD 30,000 is material. The same error in a company earning
USD 30,000,000 may not be material.

Materiality involves more than the relative dollar amounts. Often the nature of the item makes it material. For
example, it may be quite significant to know that a company is paying bribes or making illegal political
contributions, even if the dollar amounts of such items are relatively small.
Conservatism Conservatism means being cautious or prudent and making sure that assets and net income
are not overstated. Such overstatements can mislead potential investors in the company and creditors making loans
to the company. We apply conservatism when the lower-of-cost-or-market rule is used for inventory (see Chapter
7). Accountants must realize a fine line exists between conservative and incorrect accounting.
See Exhibit 30 for a summary of the modifying conventions and their importance.
The next section of this chapter discusses the conceptual framework project of the Financial Accounting

Standards Board. The FASB designed the conceptual framework project to resolve some disagreements about the
proper theoretical foundation for accounting. We present only the portions of the project relevant to this text.

14 FASB, Statement of Financial Accounting Concepts No. 2, "Qualitative Characteristics of Accounting
Information" (Stamford, Conn., 1980), p. xv. Copyright © by the Financial Accounting Standards Board, High
Ridge Park, Stamford, Connecticut 06905, U.S.A. Quoted (or excerpted) with permission. Copies of the

complete documents are available from the FASB.

Accounting Principles: A Business Perspective 210 A Global Text