Question

Some companies account for purchases of equipment less than $500 as expenses instead of assets. This policy is most closely linked to which accounting principle?

a. Conservatism
b.Lower-of-cost-or-market
c. Materiality concept
D. Consistency principle

Answer 1

The accounting practice of expensing equipment purchases under $500 instead of recording them as assets relates to the materiality concept, which allows for simpler accounting methods for items that are not significant to financial statement users. Option C is correct.

Step-by-step explanation:

The policy of accounting for purchases of equipment less than $500 as expenses instead of assets is most closely linked to the materiality concept in accounting. This concept suggests that relatively small amounts that would not influence the decision making of a user of the financial statements could be accounted for in the simplest, most cost-effective way possible.

By not capitalizing such small purchases, companies are effectively saying that the effort of tracking and depreciating these assets does not provide valuable information to investors, creditors, or management and, therefore, they expense them immediately.