Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expenseof the period when purchased is an example of the application of theA. consistency quality.B. expense recognition principle.C. materiality quality.D. historical cost principle
The correct answer and explanation is:
Correct Answer: C. Materiality quality
Explanation:
Charging off the cost of a wastebasket with a useful life of 10 years as an expense in the year it is purchased illustrates the application of the materiality quality in accounting.
In theory, any asset that provides economic benefits over more than one period, like a wastebasket expected to last 10 years, should be capitalized and depreciated over its useful life according to the expense recognition principle (also known as the matching principle). This principle ensures that expenses are matched with the revenues they help generate, providing a more accurate picture of a company’s financial performance.
However, in practice, companies often immediately expense low-cost items such as wastebaskets, staplers, or calculators, even though they may be used over multiple years. Why? Because the cost of tracking, depreciating, and maintaining records for such insignificant items outweighs the benefit. This is where the materiality quality comes into play.
Materiality is a concept that allows accountants to disregard accounting principles if the impact of doing so is so small that it would not affect users’ decisions based on financial statements. In other words, if an item is immaterial, it can be treated in a simpler way—even if that means technically violating strict accounting rules—because doing so has no significant impact on the accuracy or usefulness of the financial information.
By charging off the wastebasket immediately as an expense, the company simplifies its accounting without misleading stakeholders. This treatment is justified by the materiality quality, not by consistency, expense recognition, or historical cost principles.
- Consistency refers to applying the same methods over time.
- Historical cost refers to recording assets at their original purchase price.
- Expense recognition governs when expenses should be recorded, but only applies if the item is material.
Thus, the correct principle applied here is C. Materiality quality.