What are the qualities of accounting information?

2. Accounting information characteristics

Letís look at each characteristic in greater detail to understand why it is important for accounting choice.

Relevance:

Relevant accounting information makes a difference in a decision making process and might have the following characteristics:

  • It is predictive: relevant accounting information can be used to predict future events
  • It provides feedback: relevant accounting information confirms or corrects prior expectations
  • It is timely: relevant accounting information is current and can influence the accounting choice (i.e., is available before the decision is made).

Relevance is related to the concept of materiality (for further reference, see this accounting materiality article).

Reliability:

Reliable accounting information is faithfully presented and has the following qualities:

  • It is verifiable: reliable accounting information is unbiased and free from errors
  • It is factual: reliable accounting information is complete
  • It is neutral: reliable accounting information doesnít target interests of specific users of accounting information (i.e., doesnít favor certain users of accounting information over the others) and presents the actual position of the entity†

To ensure the reliability of accounting information, an audit of financial statements should be performed.

Comparability:

Comparable accounting information allows comparison between or among different entities.

Accounting information is comparable if the same accounting principles and methods are used by different entities. However, different entities might use the same accounting principles (e.g., revenue recognition, matching principle, historical cost) but different accounting methods (e.g., straight-line vs. declining-balance depreciation method, LIFO vs. FIFO).

To ensure the comparability of accounting information, companies are required to disclose their accounting methods (policies).

Consistency:

Consistency is related to comparability. While comparability allows a comparison between and among different entities, consistency allows a comparison within a single entity.

Accounting information is consistent when an entity uses the same accounting principles and methods from one accounting period to the next: this quality allows external users of accounting information to analyze the entity over time (e.g., analyze trends). Nevertheless, organizations are allowed to change their accounting methods. When a new accounting method is adopted, the organization must disclose the change in the notes to financial statements. The change doesnít make the comparison impossible, but it makes the analysis more difficult to perform.

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