What are the qualitative characteristics of accounting PDF?

The primary objective of financial reporting is to provide useful information for making business decisions.

Useful accounting information should possess two fundamental qualitative characteristics:

1. Relevance
   Relevance means that the information can influence the economic decisions made by users.  For example, the information may help users to predict future events, such as future cash flows, and help determine alternative courses of action under consideration.  Information is also relevant if it is able to help decision makers evaluate past decisions.  Thus, information that is relevant is said to have a predictive role and a confirmatory or feedback role.
2. Reliability
   Reliability means that the user is assured that the information presented represents faithfully, without bias, the transactions and events being reported.  This is a major reason that accountants record assets at their original historical cost.  For accountants to record current market values requires the use of estimates, appraisals or opinions, all of which are more unreliable.

Additionally, there are enhancing qualities.

• Timeliness
  For accounting information to be relevant, it must be timely, i.e. it must be available to the decision makers before it loses its capacity to appropriately inform decisions.
• Comparability
  Comparability results when different companies use the same accounting principles.
• Materiality
  It is important that users are not overwhelmed with so much detail that they cannot clearly understand the message.  The concept of materiality relates to the extent to which information can be omitted, misstated or grouped with other information without misleading the statement users when they are making their economic decisions.
• Verifiability
  Information is verifiable if independent observers, using the same methods, obtain similar results.
• Consistency
  A company uses the same accounting principles and methods from year to year.
• Understandability
  When information is included in general purpose financial reports, there is an obvious need for the users of those reports to be able to comprehend their meaning.

Do you know what the qualitative characteristics of accounting information are? If your answer is no, then you are in the right place.

In this article, we are going to learn the qualitative characteristics of accounting information.

Accounting information has qualitative characteristics that help differentiate more useful information from less useful information.

Primary Characteristics of Accounting Information

The primary characteristics of accounting information are as follows:

1.Relevance:

Information is important because it has the potential to influence a decision. Information should have predictive value, feedback value, and timeliness to be important.

• Predictive Value:

Predictive value refers to the ability to predict the ultimate outcomes of past, current, and future events using information.

• Feedback Value:

Information that helps users affirm or correct previous assumptions is referred to as feedback value.

• Timeliness:

Timeliness refers to the availability of facts in a timely manner to affect a decision. That is, financial statements for an entity should be compiled and presented as soon as the accounting period ends, not months or years later.

2. Reliability:

Information can be trusted if it is error-free and free of personal bias. Information should provide Verifiability,’ Representational faithfulness,’ and Neutrality’ in order to be trusted.

• Verifiability:

Verifiability’ refers to the willingness of independent evaluators or users to reach the same conclusion provided the same details and process.

If a note specifies that the straight-line method is used to calculate the depreciation of an organization’s tangible fixed asset, the amount of depreciation would be the same regardless of who uses it. This is what verifiability is all about.

• Representational Faithfulness:

Representational faithfulness is a vital aspect of reliability because it ensures that the information accurately reflects what actually occurred.

For example, if an organization’s gross sales are $49,000 but the income statement shows $50,000, the income statement is not a faithful representation. As a result, the information should be free of at least some deliberate mistake.

• Neutrality:

The term “neutrality” refers to the fact that the information provided is free of prejudice. The evidence provided does not support the interests of one party over those of another.

For example, a balance sheet should accurately and neutrally reflect a business enterprise’s assets, liabilities, and owner’s equity at a specific point in time, which can be checked by an auditor.

Secondary Characteristics of Accounting Information

The secondary characteristics of accounting information are as follows:

Information about a company is more relevant if it can be compared to similar information from other companies (comparability) and to information from the same company over time (consistency).

1.Comparability:

Information becomes more helpful if it lends itself to intra- and inter-comparison, according to the concept of comparability.

Intra-comparison refers to comparing an organization’s one accounting period’s information with the same information from another accounting period, such as a comparison of sales from 2019 to 2020.

Inter-comparison, on the other hand, is the process of comparing one organization’s information with the same information from another.

For example, in 2020, the ABC Company declared a dividend @10%, whereas the XYZ Company declared a dividend @12% in the same year. This data can be compared in an informative way.

2. Consistency:

The accounting terms, procedures, or principles described in the financial statements are to be utilized consistently from one period to the next, according to consistency.

When it can be proven that a different accounting approach would produce a better outcome, it may be implemented.

And the reason for the change, as well as the nature and impact of the change, must be communicated.

For example, In a business, the accountant follows management’s instructions and modifies the depreciation policy for fixed assets from a straight line to a decreasing balance method.

Because the use of fixed assets is typically higher in the early years of their expected life, management adds a remark to the financial statements explaining why the new technique is more justifiable than the previous method of depreciation.

I hope at the end of the article, you are clear about what the qualitative characteristics of accounting information are? If you have any confusion and want to know more don’t forget to comment on us.

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