What are the qualities of accounting information?
June 17, 2012
Discover the qualities of accounting information such as relevance, reliability, comparability and consistency.
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 individualís 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.