Qualitative Characteristics of Accounting Information
Financial Accounting I
BBA | BBA-BI | BBA-TT | BCIS
Accounting is an information system which measures, processes and communicates financial information of an organization. The business activities are indentified and measured in term of money, which are then processed and finally communicated to the various group of users.
The quality of accounting information that makes it comprehensible to those willing to spend the necessary time.For anything to be useful, it must be understandable. Usefulness and understandability go hand to hand. However, understandability of financial information varies considerably depending on the user’s background.
Understandability alone is certainly not enough to render information useful.According to the FASB,two fundamental characteristics make accounting information useful.The information must b e relevant,and it must be faithful representation.
The capacity of information to make difference in a decision. Sometimes information may have predictive value. for e.g. Assume that you are a banker evaluating the financial statements of a company seeking a loan.The financial statements point to a strong,profitable company .However,today’s news revealed that the company has been named in a multimillion-dollar lawsuit.This information would be relevant to your talks with the company.Disclosure of the lawsuit in the financial statements would help you predict whether it would be wise to make a loan to the company.
In other case information may have confirming value. for e.g. Assume that you invest in a company because you think it may enter new Asian markets in the near future.Disclosure in the statements that the company acquired a Chinese subsidiary would confirm you made the right decision to invest in the company.
The quality that makes accounting information dependable in representing the events that it purposes to represent.
– Verifiability (free from error)
Comparability allows comparisions to be made between or among companies.For accounting information, the quality that allows a user to analyze tow or more companies and look for similarities and differences.
Consistency means that financial statements can be compared within a single company from one accounting period to the next.For accounting information, the quality that allows a user to compare two or more accounting periods for single company.
The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information. It is closely related to relevance and deals with the size of an error in accounting information. The issue is whether the error is large enough to affect the judgment of someone relying on the information.(Pencil and computer).
The practice of using the least optimistic estimate when two estimates of amounts are about equally likely. It is a holdover from earlier days when theprimary financial statement was the balence sheet and the primary user of this statement was the banker.It was customary to deliberately understate assets on the balence sheet because this resulted in an even larger margin of safety that the assets being provided as collateralfor a loan were sufficient.Today,the balence sheet is not the only financial statement ,and deliberate understatement of assets is no longer considered desirable.The practice of conservatism is reserved for those situation in which there is uncertainity about how to accout foer aparticular item or transaction.