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Accounting information can be used by business owners to carry out a financial analysis of the businesses and their operations. The use of this information for such function is attributed to the fact that it usually contains quantitative and qualitative characteristics. While quantitative characteristics are the calculations of financial transactions while qualitative characteristics can be described as the business owner's apparent significance of financial information. In essence, qualitative characteristics of financial information are attributes that contribute to the usefulness of information provided in financial statements. Since these qualities can sometimes be at odds with each other, they need to be balanced against each other. In addition, these qualities are essential in decision making because they provide the basis for assessing businesses and the effectiveness of their operations.
Fundamental Qualitative Characteristics:
As previously mentioned, qualitative characteristics in accounting are attributes that result in the usefulness of provided financial information by users. These characteristics are important in the modern business environment because of their significance in making business decisions. Actually, these characteristics help in promoting appropriate decision-making and correct assessments of business operations (Vitez, n.d.). Generally, the qualitative characteristics of accounting information are classified into two categories i.e. fundamental/principal and enhancing qualities.
One of the fundamental qualitative characteristics of financial information is relevance, which refers to the ability of the provided accounting information to remain aligned with the purpose to be accomplished. Generally, accounting information should always relate to a particular period of time or consist of information about...
The information should also be relevant to creditors, business owners, investors, and other stakeholders in the business. Under this characteristic, the accounting information must have predictive value and confirmatory value. Predictive value refers to the confirmation of the expectations of investors regarding future ability to generate cash. The predictive value is an important component since it helps users to predict future trends of the business. On the contrary, confirmatory value refers is used to verify or correct any previous predictions that have been made on the trends of the business.
The second fundamental qualitative characteristic of accounting information is faithful representation, which occurs when there is consensus between a description or measure and the incident it supposedly represents. Faithful representation implies that the numbers and imagery in the financial statements must represent what actually happened. Faithful representation takes place when the accounting information is complete, neutral, and free from error. Accounting information must be prepared in a manner that they are free from material bias and error by holding themselves out. Completeness, neutrality, and free from errors enables the accounting information should represent an accurate picture of the business' financial health (Spiceland, Sepe & Tomassini, 2007). Neutrality means that the accounting information is impartial with regards to parties potentially affected by it. This component is highly linked to the establishment of accounting standards and balancing economic consequences. With regards to completeness, accounting information should not favor any party but provide accurate reflection of the company's financial status and health.
Enhancing Qualitative Characteristics:
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References:
Spiceland, J.D., Sepe, J.F. & Tomassini, L.A. (2007). Intermediate accounting (4th ed.).
Retrieved February 20, 2014, from http://highered.mcgraw-hill.com/sites/0072994029/student_view0/ebook/chapter1/chbody1/qualitative_characteristics_of_accounting_information.html
Vitez, O. (n.d.). Qualitative Characteristics of Accounting Information. Retrieved February 20,
2014, from http://smallbusiness.chron.com/qualitative-characteristics-accounting-information-3952.html
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