What is accounting information explain any four qualitative characteristics of accounting information?

Discover the qualities of accounting information such as relevance, reliability, comparability and consistency.

1. Qualitative characteristics of accounting information

There are four (4) qualitative characteristics of accounting information that serve as the basis for decision making purposes in accounting:

• Relevance: information makes a difference in decision making
• Reliability: information is verifiable, factual, and neutral
• Comparability: information can be used to compare different entities
• Consistency: information is consistently presented from year to year

These qualities make accounting information understandable and useful for decision and reporting purposes: the goal of financial reporting is to provide useful information to current and potential investors, creditors, and other users of accounting information (e.g., government, standard-setting bodies) to make investment, credit, and other decisions.

Accounting information qualitative characteristics are summarized below:

In addition to the aforementioned characteristics (i.e., relevance, reliability, comparability, and consistency), the following qualities of accounting information affect its usefulness: understandability, materiality, and conservatism.

Understandability allows the users of accounting information to comprehend (understand) accounting information, given they spend the necessary time.

Materiality refers to a relative significance or importance of an item - dependent on individual’s judgment - to the overall financial condition of a company. Information materiality and cost-benefit relationship (i.e., whether information benefits outweigh its costs) impose constraints on the usefulness of accounting information.

Conservatism (i.e., accounting practice of prudence when there is business uncertainty) can also affect the usefulness of accounting information.

To learn more about materiality and conservatism, read this accounting article.

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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;

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 (comparison 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. It is important that all the data is 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 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 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 not important.

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