Qualitative Characteristics of Accounting Information

Accounting is a part of a company’s information system, which contains both financial and non-financial records. Accounting is the procedure of collecting, measuring, and reporting economic information in so that the users of the information can make judgments and choices. Accounting’s primary objective is to supply users with information. Accounting information is utilized by a big group of individuals, including employees, investors, creditors, and the government, therefore it is also necessary to fulfil certain broad social responsibilities.

Accounting is classified into 2 types: (1) financial accounting and (2) managerial accounting. The preparation of general-purpose reports for use by people outside of an organization is referred to as financial accounting. Shareholders, creditors, financial analysts, labour unions, and government restrictions are examples of users. 

Managerial accounting, on the other hand, relates to the distribution of information to executives inside a company. A production manager, for example, may want a report on the quantity of product units made by various workers in order to evaluate their performance. 

Qualitative Characteristics of Accounting Information

The qualitative features are attributes that enhance the utility of financial statement information. According to the framework, financial statements should strive to maintain the following four qualitative qualities as much as possible within proper cost/benefit boundaries.

Understandability: Financial statements should convey information in a way that people with a basic understanding of business and economic activity, as well as accounting, can understand.

Relevance: It is false to believe that the more information disclosed, the better it is. Confusion is created by plenty of useless information, which can be even more dangerous than non-disclosure. 

Only relevant information should be included in the financial statements. Relevant information is that which is likely to impact the users’ economic decisions. Such data may help the users in evaluating past, current, or future events, as well as validating or correcting previous assessments. The materiality of a piece of information should be used to determine its significance. A piece of information is said to be material if its misrepresentation (i.e., omission or false statement) has the potential to impact a user’s economic decisions.

Reliability: For information to be helpful, it must be accurate and free from bias. The information provided is likely to be unreliable unless: 

(a) Reported transactions and events are accurately depicted.

(b) Transactions and events are reported using the “substance over form” approach.

(c) Transactions and events are reported in an impartial, unbiased manner.

(d) When reporting the result of uncertain transactions or events, prudence is used.

(e) Financial statements must contain accurate information.

Comparability- Financial statement comparison is one of the most often utilized and successful financial analysis methods. Both inter-firm and intra-firm comparisons must be possible using the financial statements. The disclosure of the financial impact of changes in accounting principles is one of the most important requirements of comparability.

Users of Accounting Information

Accounting information is useful for the following three purposes-

Managerial decision making- Managers are constantly faced with the necessity to make decisions. Some of these actions may have an immediate impact, while others will have a long-term impact. Management must make decisions about the pricing of a product, whether to make or purchase it, whether to discontinue it, whether to expand its area of operations, and so on. Accounting offers the required information to arrive at the correct conclusions.

Managerial planning, control and internal performance evaluation: Managerial accounting is crucial for planning and control. Information is supplied for setting the standard by assisting management in the decision-making process. Accounting also gives real results against which predictions may be compared. Accounting gives you the information you need to track changes in your actual performance.

External Financial reporting -Accounting has always been utilized to provide information to individuals who are interested in the company’s operations. Various laws have been established requiring financial statements to be prepared in a way that provides required information to shareholders, creditors, the government, and others. Information must be collected in accordance with generally accepted accounting standards so that it can be used to make accurate choices.

Conclusion

To summarize, accounting information consists of sets of financial statements that are valuable to both internal and external consumers of a firm. Accounting’s goal is to offer users with meaningful information to help them make decisions. They utilize this data to create business strategies and make strategic decisions for the company. In a nutshell, an organization’s informational role enables various users to make relevant and correct economic and financial decisions.