Qualitative Characteristics of Accounting Information
There are some qualities of accounting that make it useful for both external and internal users of accounting. Without these qualities, accounting information wouldn’t be clear, and an orderly view of the business would not be visible. 4 qualitative characteristics of accounting information are;
Comparability
Comparison is a very important part of financial information as it helps the users of accounting information to differentiate, analyze, improve, and take important decisions.
The ability to do intra-firm comparisons (within the same company), inter-firm comparisons (with other companies), and market sector comparisons (comparisons within the same market sector) make accounting information easy to work with.
Example of Comparability – QoQ (Quarter on Quarter) & YoY (Year on Year comparisons) should be possible with the accounting information.
Understandability
The presentation of accounting information should be simple and understandable for the users of the information. All the data must be clear and concise, it can be easily understood by everyone, including parties who are not from an accounting background.
All relevant explanatory notes should be provided along with the financial statements. Method of valuation of inventory, method of depreciation, information on reserves and surplus, contingent liabilities, and any other extraordinary items.
Example of Understandability – It should be possible for bankers, investors, employees, etc., to understand the financial information of the business.
Reliability
One of the most important qualitative characteristics of accounting information is the reliability of data, i.e. all information provided must be traceable and verifiable with proper source documents.
In an internal or external audit, the information inside financial statements should be confirmable back to its source. Failure of an audit may lead to disbelief in the company’s financial data.
Example of Reliability – An auditor must be able to verify a transaction back to its origin with the help of invoices, memos, purchase orders, sales orders, etc.
Relevance
Relevance of accounting information means it should help the user of information with their decision-making process. The information provided should not be irrelevant and unnecessary. All information should be capable of monetary computation.
Example of Relevance – A firm is expected to provide the total amount owed by the debtors on the balance sheet, whereas the total number of debtors is unimportant.
Short Quiz for Self-Evaluation
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