Qualitative characteristics of accounting information

Qualitative Characteristics of Accounting Information accountingrevenue.com/qualitative-characteristics-of-accounting-information.html Sanjoy19

July 29, 2020

Two fundamental characteristics of financial statements are their truth and fairness. An auditor of the enterprise has to make a statement give a true and fair view. Besides the above two fundamental characteristics, there are other qualitative characteristics accounting information or features of accounting information.

Learning Objectives: i. qualitative characteristics of Accounting Information.

After studying this unit,you will be able to: Accounting information must have some qualitative Characteristics. These are the attributes that make the information available from financial statements useful to the users. It has four main qualitative Characteristics of Accounting Information: i.

Reliability ii.Relevance iii.Understandability and iv. Comparability.

Qualitative Characteristics of Accounting Information can be diagrammatically represented as follows:

Qualitative Characteristics of Accounting Information

Qualitative Characteristics of Accounting Information: i. Reliability: Reliability means that the accounting information should be such that it can be

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independently verifiable, information has the quality of reliability only when it is free material error and bias or subjectivity and can be relied upon by the users to represent faithfully.The other subsidiary features that make an information reliable are – a. Faithful Representation: To be reliable, information must represent faithfully the effects of transaction and other events that either purports to represent or could reasonably be expected to represent.

It is necessary that the transactions should be accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

For instance, A Ltd.Co, has purchased equipment for official and the right, and the beneficial interest of the transaction has been passed but the documentation and legal formalities are pending. In such a case, the equipment should be shown in the Balance Sheet as own property although legal formalities in respect of the transfer of ownership has not yet made. b. Neutrality: To be reliable information contained in the financial statement must be neutral and impartial. On many occasions, judgment is required regarding various items of Financial Statement. E.g.Valuation of stock, computation of amount of doubtful debt.

Thus, in these cases, in order to maintain neutrality, Judgement must be made without any business. c.Prudence: Prudence is the inclusion of a degree of caution in the exercise of Judgement required whole compiling financial statements and estimating the outcomes of uncertain events.

However, the exercise of prudence does not allow the creation of secret reserves or excessive provisions, deliberate understatement of assets and income or deliberate overstatement of expenses and liabilities, etc. d. Completeness: To be reliable information must contain in the financial statement must be complete within the bounds of materiality and cost.

If the source documents are not readily available, the accounting information reveals by the financial statement will not be capable of verification and thus, it can not rely upon.

An omission ensures information to be false or misleading.

ii. Relevance: To be relevant, information must have the quality of influencing the economic decisions of users by assisting them to evaluate past, present or future events or confirming or rectifying the past evaluation, Relevance should be defined in terms of ability to 2/4

influence the decision maker’s course of actions because whether a particular set of accounting information is relevant or not depends on the specific needs of the decisionmakers.

It is to be ensured that the information provided is material and relevant for decision making. For instance, if you want to know the debtors against your sales, then the amount of debtors is relevant and not the number of debtors.

Sometimes, it is very difficult to decide which information is relevant and which irrelevant. Again it may happen, that information may be relevant to one user and irrelevant to the other one.

Thus, the information which is common to all users should be provided. Moreover, the priority of relevance should be decided on the basis of the concept of truth, justice, and fairness.

iii. Understandability: To be understandable, decision-makers must interpret accounting information in the same sense at which it is compiled and conveyed to them. An essential quality of accounting information is that it must be readily understandable by the users.

The existence of various accounting information makes the task complex. For instance, a certain term that is easily understandable to the investors may be misleading for creditors. thus, information must be presented in such form and use such terminology, so that both investors and creditors understand.

Complex information should be avoided. But relevant information may be complex, should not be avoided. In such a case, such information should be supported by relevant notes so that different users can understand easily.

iv.Comparability: Comparability of accounting information is possible only when the previous years’ figures along with the current year figure is available so that the present result can be compared with the past and on the basis of which future performance can be estimated.

The usefulness of accounting information, when users can able to compare the financial position and cash flows. Users must compare the financial statement of different enterprises in order to evaluate their relative financial position, performance, and cash flows.

To ensure comparability,-the principle of consistency should be adhered to, which implies that some policies should be followed year after year. Lack of consistency may distort the comparable quality of financial statement information.

Apart from this, comparability also requires that the principle of disclosure should also be followed. As per this principle, full disclosure of all material matters affecting the 3/4

financial statement that would be of interest to the user of accounting information must be made.

Quick Revision Qualitative Characteristics of Accounting Information:

1.Reliability: Accounting information must be reliable. Reliability of information means it is verifiable, free from material error and bias. It depends on: Neutrality, Prudence, Completeness, and substance over form.

2.Relevance: The accounting information, besides disclosing statutorily required information, should disclose other information, after judging its relevance to the decision-making need of its users.

3.Understandability : Understandability means that the information provided through the financial statements be presented in a manner that the users are able to understand it in the manner it should be understood.

4.Comparability: Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, Known as inter-firm comparison or with the accounting information of another enterprise, known as inter-firm comparison.

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