What accounting concept applies when the reporting of accounting information should be free from personal bias?

1. Career development
2. Qualitative Characteristics of Accounting Information: Definition and Types

By Indeed Editorial Team

Published April 26, 2021

Qualitative characteristics of accounting information assist management, investors and accountants in making important decisions and predicting financial outcomes. Learning the different characteristics can help you understand how to produce accurate, reliable financial documents that can improve your company's financial well-being. In this article, we list different types of qualitative characteristics of accounting information, provide steps on how to use these characteristics and share an example of these characteristics so you can see how one would use them in the decision-making process.

Related: What Is Accounting?

What are qualitative characteristics of accounting information?

Qualitative characteristics of accounting information are traits that allow financial professionals to more easily understand and make decisions on accounting reports.

There are six different types of qualitative characteristics of accounting information, including:

Relevance

Relevance, in regards to accounting information, is a characteristic that can help individuals make decisions related to a business's finances. For accounting information to have relevance, it first requires confirmatory value, which provides information about past financial events, and then predictive value, which can provide predictions about future financial events. A business should have both confirmatory and predictive value to develop accurate accounting information.

Professionals consider accounting information relevant if it provides information about past events that can assist in making predictions about future events, which hopefully results in more profit or helps solve any upcoming financial problems. For example, if a company's owner wants to invest in a new asset, they can consult their previous investment history since that information applies to any future investments they make.

Representational faithfulness

Representational faithfulness, sometimes known as financial reliability, is information that properly indicates a company's transactions, resources and overall financial assets.

There are three factors that measure a company's representational faithfulness, including:

• Completeness: A company that exhibits representational faithfulness includes each transaction it completes or participates in to give a more accurate depiction of its finances.

• Neutrality: A neutral company does not involve bias when evaluating its finances—no matter if the information is positive or negative—in order to give an accurate report.

• Free from error: This relates to a company's accounting team not having any errors in their calculations, which leads to a more accurate financial report.

Verifiability

To create accurate financial predictions, a company ensures that its financial information is verifiable. Verifiability involves authenticating financial information and calculations by using several independent sources to develop the same results. This means that external auditors and professionals may evaluate a company's financial reports and develop the same results as the company's accountants. If this occurs, a company's information is accurate and verifiable. If the information isn't verifiable, then the company knows to rework its financial report and perform calculations again.

Understandability

Since decision-making for a company often involves professionals outside of the accounting department, such as managerial professionals, it's important that financial reports are easy to understand. Understandability is the measure of how easily an individual can comprehend a company's financial report or accounting information. Often, financial reports can be dozens of pages long and contain complex financial vocabulary and extensive calculations.

Most companies aim to have financial reports that individuals without a background in accounting can understand. A great way to make financial reports easier to understand is to include notes that explain common accounting concepts, such as methods of valuation and information on inventory.

Comparability

Comparability is an essential part of accounting information because it helps professionals differentiate and analyze financial reports that help make decisions. Comparability involves the process of evaluating one financial period with another to understand a company's trends and overall financial performance. A company can compare financial statements by using accounting methods such as balance sheets, cash flow statements or income reports.

Comparability can also refer to a company's ability to compare its financial statements to its competitors. This can offer insight into how a company is performing and allows a decision-making team to understand changes to be made in response to the comparison.

Related: Understanding Cash Flow Statements: A Complete Guide With Steps, Methods and Examples

Timeliness

Timeliness involves how rapidly accounting information is available to professionals. There is often a period of time before financial information can reach an accounting department after a transaction occurs, the speed of which depends on how efficient a company's communication is. If information reaches a company quickly, it allows an accounting team to make timely decisions.

Related: Steps and Components of the Communication Process

Why are qualitative characteristics of accounting information important?

Qualitative characteristics of accounting information are important because they assist business professionals in understanding and using the information found in accounting reports. These characteristics provide explanations for the numbers in accounting reports and show professionals how to use them to make decisions and predict future financial outcomes.

Here are a few other reasons professionals might use qualitative characteristics of accounting information:

• Uncovers trends: Applying qualitative research to accounting information can uncover financial trends that might not have been otherwise apparent.

• Provides explanations: Looking at the information from a qualitative perspective allows individuals to understand why a business may be performing in a certain way.

• Offers insight: If a company experiences economic hardship, using qualitative research can offer insight into the causes of problems.

• Develop predictions: Using qualitative characteristics can help a company make predictions on how it can better perform financially.

Related: Guide To Business Forecasts

How to use qualitative characteristics of accounting information

Follow these steps to assist you in using qualitative characteristics of accounting information for your company:

1. Extract relevant information

Extracting relevant information from previous financial statements can help you predict future financial outcomes. Ensure that the information you extract is relevant to the information you want to predict. For example, if you want to predict future tax information, you can search for previous tax information from past financial records and analyze trends.

2. Check your information

To ensure reliability, check that the information you have extracted is complete, neutral and free from error. You can either conduct this step yourself or have external accountants ensure that the information is accurate and error-free.

3. Verify the information

Enlist the help of an auditor to ensure your information is verifiable. To keep the information unbiased, use an auditor who does not work within your company. Hiring an external auditor helps keep your information accurate and unbiased.

4. Ensure that the information is understandable

Once an auditor verifies the information, it's important to ensure the information is easy to understand. One way to measure how easy the information is to understand is to have professionals outside of the accounting department evaluate the information.

5. Compare the information

To complete the process, compare the information to similar information from a different financial period. While doing this, try to recognize any trends and evaluate overall financial performance so you can form an accurate prediction of future financial periods.

Qualitative characteristics of accounting information example

Here is an example of how a company may use the above steps to help them with an important decision regarding their finances:

A children's toy company wants to understand how it can improve its sales within the next year.

Their accounting team uses the relevance characteristic by extracting relevant information that may help them decide how they can improve their sales. This relevant information includes their cash flow statements from the past year, which shows their overall operating costs and sales income.

Then, they use the reliability characteristic to ensure that the cash flow statement is complete, neutral and free from error by checking that they included all relevant statements and confirming that the accountants who created the cash flow statement were unbiased. They also determine whether the calculations are error-free.

Next, they hire a professional auditor to perform the same calculations found in the cash flow statement to ensure the information is verifiable.

During this time, the company enlists the help of individuals outside the accounting department by having them analyze the cash flow statement to determine how easy it is to understand.

Now, the company's accounting team compares their cash flow statement to previous cash flow statements to help them determine any trends that may help them improve sales. They can also add new financial information they receive in a timely manner while they make decisions.

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