Qualitative Characteristics of Accounting Information
➦ Accounting is an information system which measures, processes and communicates financial information of an organization.
➦ The business activities are identified and measured in term of money, which are then processed and finally communicated to the various group of users.
➦ The major qualitative characteristics of accounting information are explained in detail below:
1. Understandability:
➦ 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.
2. Relevance:
➦ 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.
3. Reliability:
➦ Reliability is one of the qualitative characteristics of accounting information that enhances its usefulness for decision-making purposes.
➦ Reliability refers to the degree of assurance that the information presented in financial statements is free from material error and bias and can be trusted by users to represent the economic substance of transactions faithfully.
➦ The quality that makes accounting information dependable in representing the events that it purposes to represent.
➨ Verifiability (free from error)
➨ Representational faithfulness
➨ Neutrality
4. Comparability:
➦ Comparability allows comparisons 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.
➦ Comparability is another qualitative characteristic of accounting information that enhances its usefulness for decision-making purposes.
➦ Comparability refers to the ability of users to identify and understand similarities and differences between different entities’ financial information or between different periods of the same entity.
5. Consistency:
➦ 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.
➦ Consistency is a fundamental qualitative characteristic of accounting information that ensures uniformity and stability in the application of accounting policies and practices over time within the same entity.
➦ It means that once an accounting method or policy is selected, it should be consistently applied from one accounting period to another, unless a change is necessary due to a legitimate reason or a change in accounting standards.
6. Materiality:
➦ 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).
7. Conservatism:
➦ 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 the primary financial statement was the balance sheet and the primary user of this statement was the banker.
➦ It was customary to deliberately understate assets on the balance sheet because this resulted in an even larger margin of safety that the assets being provided as collateral for a loan were sufficient.
➦ Today, the balance 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 uncertainty about how to account for a particular item or transaction.
References
- Team, C. (2023a, October 4). Qualitative characteristics of accounting information. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/qualitative-characteristics-of-accounting-information/
Related Posts
- How Notes payable differs from Accounts payable
- Periodic Vs Perpetual Inventory System
- Financial Accounting Vs Management Accounting
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
- As part of the consent process, the federal regulations require researchers to: - September 8, 2024
- Concept and Nature of Intellectual Property Rights – Explained in Detail | Business Law - January 30, 2024
- Management Information Systems Online Degree – Courses, Colleges, and Careers in MIS - January 16, 2024