Accounting Information is essential to understand the financial position of any business. It must possess specific characteristics so that the management of a firm can use this information to make critical strategic decisions and formulate plans for the future. Companies must aim to imbibe these qualitative characteristics of accounting information while presenting the financial reports to the stakeholders of an organisation. These characteristics help the stakeholders to get a better understanding of the company’s financial position and make informed decisions about their activities related to the business.
The main qualitative features of accounting are as follows:
- Relevance – The accounting information presented through financial statements and reports must give a clear picture of both past events and future projections. It will help the stakeholders make informed decisions. For example, A shipping company has managed to earn decent profits over the past few quarters, and the future projections are also looking good. If a company presents this accounting information to their creditors, they are more likely to continue extending their line of credit to the company in the near future. And if a company presents this information to shareholders, they might be tempted to invest more in the company.
- Reliability – The accounting information presented to different stakeholders in an organisation must be factual, accurate and free from bias or errors. Representational faithfulness of financial reports is crucial to gain the trust of stakeholders. It should not exclude any transaction to hide the accurate picture of a company’s financial health. It should not be biased towards the management or present an unrealistic picture of the company. It should also be free from any mistakes due to omission, commission or both, to not damage the credibility of the information coming from these reports.
- Verifiability – One of the most important qualitative characteristics of accounting information is that it must be verifiable. For example, suppose an accountant says that the depreciation on an asset must be worth a certain amount based on certain calculations. In that case, they must do those calculations based on sound accounting measurement used without any bias or error. Any auditor who monitors an organisation’s accounts will also look into this aspect while checking the books of accounts.
- Timeliness – Timeliness is an essential qualitative characteristic. It talks about how swiftly the accounting information is made available to users. Stakeholders need the latest financial reports and statements to make informed decisions on several issues. For example, the creditors and investors are waiting for a company’s financial reports this year to decide whether to put more money into the firm’s operations. But the report gets delayed by six months due to unforeseen circumstances. It would then be difficult for them to decide since the information provided by the firm is not up to date.
- Understandability – Understandability is the ease with which the stakeholders can grasp the information in financial reports and statements. Organisations must disseminate information about the company in a way that others can understand without much effort. If the company makes complex reports that are extremely difficult to understand, it would also affect the decision-making of parties involved in the running of a business. Companies often use excessive jargon and complex sentences or publish extremely lengthy reports to hide their poor performance. It also hinders the decision-making process for parties like investors, creditors, suppliers, etc.
- Comparability – Comparability refers to the extent to which companies consistently apply accounting policies and standards across multiple financial periods. Suppose the financial statements of different years of a company are comparable to one another. In that case, it helps the stakeholders see the trends and performance of the business over time. Comparability of financial statements with other companies is also essential because it allows the stakeholders to understand the overall industry trends and outlook in a better way.
Companies must seriously adhere to these qualitative characteristics of accounting information while preparing financial statements and reports. It helps the stakeholders to ascertain the actual financial position of a company and also predict future trends. It helps increase the trust of the stakeholders with the management that they are providing the latest information without hiding or falsifying anything.