Accounting 101, Lesson #7: The Qualitative Characteristics of Financial Information

Hey guys, what's up?

Hope everything's fine.

Last time we had a brief lesson regarding the accounting theories. (which you can see here)

This time we are going to discuss the qualitative characteristics of financial information.

But before that, you might be wondering when will I teach you the debits and credits of accounting.

I say, patience is a virtue.

Once we've finished our basic accounting foundation, I assure you that learning the technical process will be a piece of cake.

So without further ado, let the learning begin.

Qualitative characteristics are qualities and attributes that make financial information useful to decision makers, managers and the firm as well.

It serves as the criteria in choosing alternatives and policies.

The conceptual framework enumerates four qualitative characteristics, namely relevance , reliability, understandability and comparability.

Moreover, the qualitative characteristics is subdivided into two categories.

The primary which encompasses relevance and reliability and relates to the content of financial statements.

Relevance -  the capacity of information to influence a decision.

Relevance requires  that financial information should be related to the economic decision. It must have either feedback or predictive value if not both.

Furthermore being relevant requires timeliness,meaning it must be available before a decision is made so that it still bear the capacity to make a difference.

Reliability - is the degree of confidence that the data-users place upon the truthfulness of financial reports.

Accordingly, financial information are reliable if they are faithfully represented, it reflects economic substance, it must be neutral, prudent and complete.

Opposite to the primary is the secondary, to which understandability and comparability belong.

Understandability - requires financial information to be intelligible and comprehensible. It must not be presented in a complicated way.

Conversely, it should expressed in the simplest terms so that it'll be readily understandable to data-users.

Comparability - is the ability to bring together for the purpose of noting points of likeness and differences. Comparability is necessary in order to identify trends in financial position.

It is also essential in analyzing the performance of an entity as oppose to the performance of a leading competitor. (Benchmarking)

Well, that's it... we're really inching closer to the hard ones.

Next time we'll discuss the fundamental accounting equation.

Until then,