Read this article to learn about the following four qualitative characteristics of accounting information, i.e., (i) Reliability, (ii) Relevance, (iii) Comparability and (iv) Understandability.
1. Reliability:
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Reliability is a feature on the basis of which users may depend upon the information provided by accounting. If the accounting information is free from any undue error and bias, it is said to be reliable information. The users must believe the reliable information for the given purpose.
Reliability of accounting information is one of its most important qualitative characteristic. To ensure the reliability in the accounting information, the information should be credible. It should be verifiable by independent and neutral parties, from various source documents and vouchers such as invoices, memos, contracts and all supporting documents on the basis of which it has been generated.
It is worth mentioning that reliability can not be measured or quantified and it is a matter of perception, partly subjective and partly objective. Thus, it can be determined by the degree of faithful representation between facts and what the information is meant to be.
2. Relevance:
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Information which can influence the decisions of the users is said to be relevant. The accounting information should contain only that information which is relevant for the intended users. It should not be crowded with unnecessary and irrelevant data. It must facilitate the users in decision making process. Different users have different needs.
Thus, some information might be relevant for some users while for others it might be absolutely useless. Hence, needs of all the users should be anticipated and only such information must be supplied which is relevant to all the users. It is worth mentioning that to be relevant, accounting information must be available to the users in time so that on the basis of past evaluation corrective measures can be taken and future events can be predicted.
3. Comparability:
Comparability of accounting information is also a very important characteristic because without it, deviations cannot be ascertained and without knowing the deviations, corrective measure cannot be taken. Accounting information can be useful only when the data of one period can be compared with that of another period of the same enterprise (i.e.; intra firm comparison) or when data of two similar businesses can be compared for the same period (i.e.; inter-firm comparison).
To identify changes in the economic events over a period of time and/or between two or more entities, user should be able to compare the information contained in the financial statements. Through comparison, relative strengths and weaknesses of an enterprise can be known.
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To identify similarities and differences, accounting reports should be comparable across the firms. Accounting reports must belong to the same periods. Common unit of measurement and common format of reporting is necessary for effective comparison.
4. Understandability:
It has already been said that accounting is the language of business because it communicates each and every thing about the business activities, viz. profitability, solvency and its future prospects. Language is a means for communicating with each other. To make any language more effective and powerful, so that it can be recognized by all users, it should be interpreted by the persons in the same sense that it means to convey.
Understandability of the message conveyed by the accounting information is the quality that distinguishes between good and bad communication. When the message sent by the sender is interpreted by the receiver in the same sense in which the sender has sent, it is said to be well communicated.
Accounting information must be prepared and presented in such a manner that it can be easily understood & interpreted by their users such as investors, lenders, creditors, workers etc. The purpose of supplying the accounting information to various interested parties would be defeated if they fail to understand the same meaning and in the same sense which the information intends to convey.
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Thus, the accounts must be prepared in such a manner that even those persons who do not possess a special knowledge in accounting can also easily understand them. To explain the information given in the financial statement, accounting policies on which those accounts were prepared and relevant explanatory notes should be given, so that various users can understand the information conveyed in the sense which it intends to convey.