Qualities of Effective Accounting Information
Qualities of Effective Accounting Information
Qualities of Effective Accounting Information
Accounting information contains qualitative characteristics that make it useful to existing and potential investors, lenders, and other creditors for making decisions about an organization. A decision maker needs to determine which alternative provides the most useful information for decision-making purposes (Kieso, Weygandt, & Warfield, 2007). To make the information useful, effective accounting information needs to be understandable to a reasonably informed user and contain primary qualities of relevance and reliability and secondary qualities of comparability and consistency.
Understandability
The quality of information that lets reasonably informed users see its significance is understandability. “It is a qualitative characteristic that enables users to comprehend the information and therefore make it useful for making decisions” (FASB, 2010, p. 30). It creates a link between the users and the decisions they make. Effective accounting information must be useful and understandable so a decision maker can determine which alternative provides the most useful information to make a decision.
Primary qualities The primary qualities that distinguish information as more useful over information that is less useful are relevance and reliability (Kieso, Weygandt, Warfield, 2007). Accounting information is useful in decision-making if it is capable of making a difference in that decision. Relevant information has a predictive value by allowing the user to predict the ultimate outcome of past, present, and future events. It also has a feedback value that helps users confirm or correct prior expectations (Kieso, Weygandt, & Warfield, 2007). Additionally, relevant information needs to be presented on a timely basis before it losses its capacity to influence decision-making.
The second primary quality of effective accounting information is reliability.
Qualities of Effective Accounting Information
Accounting information contains qualitative characteristics that make it useful to existing and potential investors, lenders, and other creditors for making decisions about an organization. A decision maker needs to determine which alternative provides the most useful information for decision-making purposes (Kieso, Weygandt, & Warfield, 2007). To make the information useful, effective accounting information needs to be understandable to a reasonably informed user and contain primary qualities of relevance and reliability and secondary qualities of comparability and consistency.
Understandability
The quality of information that lets reasonably informed users see its significance is understandability. “It is a qualitative characteristic that enables users to comprehend the information and therefore make it useful for making decisions” (FASB, 2010, p. 30). It creates a link between the users and the decisions they make. Effective accounting information must be useful and understandable so a decision maker can determine which alternative provides the most useful information to make a decision.
Primary qualities The primary qualities that distinguish information as more useful over information that is less useful are relevance and reliability (Kieso, Weygandt, Warfield, 2007). Accounting information is useful in decision-making if it is capable of making a difference in that decision. Relevant information has a predictive value by allowing the user to predict the ultimate outcome of past, present, and future events. It also has a feedback value that helps users confirm or correct prior expectations (Kieso, Weygandt, & Warfield, 2007). Additionally, relevant information needs to be presented on a timely basis before it losses its capacity to influence decision-making.
The second primary quality of effective accounting information is reliability.