Accounting information system

Authors Avatar

Financial Accounting Standard Board (FASB 1980) identified “the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.” Therefore, the qualitative characteristics of accounting information have a significant role on general-purpose financial reports. In this essay, I will firstly illustrate the specific information of each characteristic (Relevance, Reliability, Comparability and Understandability) and then discuss constraints of qualitative characteristics.  

Relevance

Donald, Jerry and Terry (2007) have found that “For information to be relevant, it needs predictive or feedback value, presented on timely basis.” Accounting information has relevance if it makes a difference in a decision. Otherwise, information without relationship on making decision is irrelevant. The relevant financial information impacts investors’ resolutions with regard to the assignment of rare resources. Besides, relevant information owns either predictive or feedback value or both. Predictive value could assist users forecast. For instance, when Adidas makes its income statement, the information in them is almost regarded as relevant owning to it offers a foundation for forecasting future profit. Feedback value confirms or corrects previous expectations. When Adidas makes its income statement, it confirms or corrects initial expectations about its income performance. Finally, relevant information has timeliness. That means the accounting information has availability to decision makers before it loses its ability to affect their decisions. (Donald E. Kieso, Jerry J. Weygandt & Terry D. Warfield 2007)

Join now!

The relevance of information is affected by its materiality. Materiality illustrates an item’s influence on an entity’s whole financial condition and operations. An item is material when it has a significant role on reasonable investor or creditor making decisions. On the other hand, it is immaterial when its inclusion or omission has no effect on decision maker and then the information not be separately disclosed in general-purpose financial report. For the purpose of determining the materiality of an amount, the accountant always compares it with other items as total assets, total liabilities or net profit. (Jerry et al. 2006)

Reliability

...

This is a preview of the whole essay