Hence, we have to trade-off between them. But in order to have gain in relevance that comes with increased timeliness, it may involve sacrifices of other desirable characteristics of information, and as a result there may be an overall gain or loss in usefulness. Since the extent to which it represents faithfully the economic phenomenon it purports to represent is unknown, however, the measure cannot accurately be described as reliable. Without an interest in the future, knowledge of the past is sterile. A small abnormal expense is a good example of irrelevant accounting information. It is difficult to prepare a general purpose report which may provide optimal information for all possible users and which may command universal relevance.
If information is either not available when it is needed or becomes available long after the reported events that it has no value for future action, it lacks relevance and is of little or no use. A reporting entity is not necessarily a legal entity. Investors see materiality in terms of the rate of change or change in the rate of change. Otherwise, the information is useless. Cost-benefit analysis is at best a fallible tool.
As the branch of information system, accounting information system is the most important economic information in the enterprise; it continual, systematic and comprehensive reflects and supervises the condition of business. It is the responsibility of management to report reliable information in annual reports. Reliability is considered the most important qualitative characteristic of financial statement data, comparability is considered second in importance, and uniformity is third. For example, information regarding plant and machinery may be less reliable than certain information about current assets because of differences in uncertainty of realisation. The information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users.
Receipts and invoices make accounting information verifiable, allowing you to dig deeper into the numbers on the page to determine their accuracy and relevance. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets for example, the accrual of employee entitlements or the depreciation of equipment. Verifiability is an essential component of reliability—to be reliable, accounting information must be both representationally faithful and verifiable. Financial reporting must be timely and current in order to be used by investors and creditors. First, defining each type of users and their respective categories based in their needs. Conversely, financial information is not tailored to everyone.
Reliability: Reliability is described as one of the two primary qualities relevance and reliability that make accounting information useful for decision-making. Information that is not available when it is needed or becomes available only long after it has value for future action is useless. Constraints also arise because users have different level of competence to handle large masses of data or to interpret summarised data in making predictions. Striving for representational faithfulness does not comprehend creating an exact replica of the activities of an enterprise. Understandability refers to the way your information is organized and presented, and whether it is user-friendly. Since the point is likely to be misunderstood, it should explicitly be noted that the inability to verify the representational faithfulness of an accounting measure does not necessarily mean that the measure does not represent what it purports to represent.
In this regard, an important task is to determine the needs of user s and the terms of information that are relevant to target user s. Accounting measurements, like others, may be subject to error. For Analytical purposes, Qualitative characteristics can be differentiated into Fundamental and Enhancing qualitative characteristics. If different measurement procedures are adopted, it is difficult to predict trends in earning power or financial position of a company. Understandability Understandability requires financial information to be understandable or comprehensible to users with reasonable knowledge of business and economic activities. Relevance Relevance refers to the information provided with the statements of users associated with the purpose to be achieved.
. Also, full disclosure should be made of the alternative method applied and, whenever practical, of the monetary difference resulting from deviations from the standard. Financial information is a tool and, like most tools, cannot be of much direct help to those who are unable or unwilling to use it or who misuse it. Comparability: Economic decision requires making choice among possible courses of actions. In other words, the original cost is irrelevant or is not relevant in the decision to replace the equipment. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Timeliness is an ancillary aspect of relevance. Such information may also indicate the extent to which general economic events have changed the entity's ability to generate future cash inflows. Accounting should not be without influence on human behavior, but it should not slant information to influence behavior in a particular way to achieve a desired end. Verifiability is the capacity to back up information. Business owners often require financial information when making business decisions.