Financial reportingThe primary objective of financial reporting is to provide useful information for making business decisions. Show
Useful accounting information should possess two fundamental qualitative characteristics:
Additionally, there are enhancing qualities.
Test your knowledgeThere 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;  ComparabilityComparison 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 comparison (within the same company), inter-firm comparison (with other companies), and market sector comparison (comparison within the same market sector) makes 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. UnderstandabilityThe presentation of accounting information should be simple and understandable for the users of the information. It is important that all the data is clear and concise, it can be easily understood by everyone including parties who are not from the 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 financial information of the business. ReliabilityOne of the most important among qualitative characteristics of accounting information is reliability of data, i.e. all information provided must be traceable and verifiable with proper source documents. In case of an internal or an external audit the information inside financial statements should be confirmable back to its original 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 order, sales order, etc. RelevanceRelevance 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 in the balance sheet, whereas the total number of debtors is not important. Which characteristics of accounting states that the financial statements should be free from bias?Neutrality: A neutral company does not involve bias when evaluating its finances—no matter if the information is positive or negative—in order to give an accurate report.
Which qualitative characteristics of accounting information is reflected when the accounting information is free from errors?Understandibility qualitative characteristics of accounting information is reflected when accounting information is clearly presented. As understandibility 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.
What are the 4 qualitative characteristics?The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. The characteristic of relevance implies that the information should have predictive and confirmatory value for users in making and evaluating economic decisions.
What are the qualitative characteristics of accounting information explain?Reliability− It means that the user can rely on the accounting information. All accounting information is verifiable and can be verified from the source document (voucher), viz. cash memos, bills, etc. Hence, the available information should be free from any errors and unbiased.
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Which qualitative characteristic states that accounting information are verifiable and free from personal bias?
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