# Materiality and flux analysis

> How big a difference has to be before it matters, and the line-by-line review that explains every P&L movement before sign-off.

Source: https://lopifi.com/learn/closing-the-month/materiality-and-flux-analysis
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do you decide whether a difference is material, and what is flux analysis?** How big a difference has to be before it matters, and the line-by-line review that explains every P&L movement before sign-off.

Every step in that table raises the same question: how big does a difference have to be before it matters? That's [Materiality](https://lopifi.com/md/glossary/materiality). The tempting answer is a fixed percentage of revenue or net income, and the SEC has explicitly rejected that as a substitute for judgment. A percentage can be a starting point but not the whole call. A small error that turns a loss into a profit, or hides a covenant breach, matters whatever its size.

> “…exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.”

— [SEC Staff Accounting Bulletin No. 99 (1999)](https://www.sec.gov/interps/account/sab99.htm), Materiality is not a percentage

*[Figure: materiality]*

Illustrative: errors of different sizes on a screen cut to a threshold. Size alone lets some through that nature says must be stopped, which is SAB 99's point.

[Flux analysis](https://lopifi.com/md/glossary/flux-analysis) is the last review before sign-off. Every P&L line is compared with what it should have been, and anything that moved past a set threshold gets a sentence of explanation. In a normal month you compare against last month and the budget. Northwind has no last month, so September is read against expectation. Payroll should match the payroll register, rent should match the lease, and cost of revenue should be 54% of sales if the price list holds. If nobody can explain a line, it hasn't been reviewed.

*[Figure: flux analysis]*

Illustrative thresholds and accounts, not Northwind's: each line against the period before, with anything past the threshold sent back for an explanation.

## Where this page's rules come from

- [SEC Staff Accounting Bulletin No. 99 (1999)](https://www.sec.gov/interps/account/sab99.htm) — Materiality is not a percentage (sec)

## Read further

- https://lopifi.com/md/accounting/materiality

- **Track:** [Accounting](https://lopifi.com/md/learn/accounting)
- **Part of:** [Closing the month](https://lopifi.com/md/learn/closing-the-month) — 5 min
- **Terms taught:** [Materiality](https://lopifi.com/md/glossary/materiality), [Flux analysis](https://lopifi.com/md/glossary/flux-analysis)
- **Previous:** [Closing the month](https://lopifi.com/md/learn/closing-the-month)
- **Next:** [Locking the period](https://lopifi.com/md/learn/closing-the-month/locking-the-period)
- **The course:** https://lopifi.com/md/learn