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Qualitative characteristics and Role of Accounting Information

Qualitative characteristics and Role of Accounting Information - Success Roar Classes

What are the qualitative characteristics of Accounting?

Qualitative characteristics = attributes of accounting information (enhance its understandability and usefulness)

  1. Reliability
    1. Reliability means that the users can rely on the authenticity of the financial information.
    2. The information can be said reliable when-
      • It is based on facts or supporting documents and free from material errors.
      • Where the items are subject to personal judgment or estimations, the financial information must be free from material error and personal bias. (Qualitative characteristics and Role of Accounting Information)
  2. Relevance
    1. Accounting information must be relevant to the objective of the business.
    2. In other words, irrelevant or unnecessary information must not be included in the financial statements. For example, the number of debtors, the weight of stock, etc.
    3. Further, the information must fulfill the decision-making needs of the various users.
  3. Understandability:
    1. Financial Information must be disclosed in such a manner that it can be easily understandable by the users even those who do not have any knowledge of accounting terms.
    2. For making the financial statement understandable various explanatory statements, notes to accounts are attached with such financial statements which provide the users clarity regarding various items like the method of valuation of closing stock, useful life of the asset, etc.
  4. Comparability:
    1. It is a very important attribute that a financial statement must possess.
    2. Comparability means the user is capable of doing both intra-firm and inter-firm comparisons.
      • Intra firm comparison means the comparison of financial information of the business entity with its own financial information of more than one year.
      • Inter-Firm Comparison means the comparison of the financial information of the business entity with another business entity.
    3. For ensuring this attribute the accounting principles and assumptions must be followed consistently over a period of time. In case of change in accounting principles and assumptions, a note must be given in the financial statements.
  5. Faithfulness-
    1. The financial statements of the business entity should present a true and fair view of the affairs of the entity in the term of profitability, financial position, etc.
    2. For this purpose, appropriate accounting principles and standards must be followed. (Qualitative characteristics and Role of Accounting Information)

What are the roles of Accounting?

  1. As a Language
    • Accounting is treated as the language of the business because it prepares and communicates the financial information of the business to the users.
  2. As Historical Record
    • Accounting provides a complete and systematic record of all past financial transactions of the business.
  3. A Tool of Ascertaining Profit or Loss
    • It is used as a tool for ascertaining the profit and loss of the business by preparing a Profit and Loss Account.
  4. A Tool of Ascertaining Financial position
    • It is used as a tool for ascertaining the financial position of the business by preparing a Balance Sheet.
  5. As an Information System
    • It is also considered as an information system because it provides various information related to the business to various users for their decision-making needs.
  6. As a Service Provider
    • It is also considered as a service activity due to providing various information to help various users in their decision making.

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