Fundamental and Qualitative Characteristics of Accounting Information

Financial statements must exhibit two fundamental characteristics: truth and fairness.

An auditor must attest whether, in their opinion, the financial statements provide a true and fair view. This entails that the Balance Sheet accurately represents the state of affairs, and the Profit and Loss Account correctly reflects the profit or loss for the period.

Beyond these fundamental characteristics, other qualitative attributes make financial statement information meaningful to users. These attributes include:

1. Reliability

2. Relevance

3. Understandability

4. Comparability

Let's explore these characteristics in detail:

• Reliability :

  1. Accounting information must be dependable. Key factors that enhance reliability include:

     1. Verifiability:  Transactions should be supported by documentation. For instance, purchases should be backed by purchase bills, and sales should be supported by sales bills.

     2. Impartiality: Personal judgment should be free from bias and independent.

  2. Reliability in accounting information is further strengthened by:

     1. Neutrality: Information should be unbiased.

     2. Prudence: Accounting should be conservative, recognizing all probable losses while not anticipating potential gains.

     3. Completeness: Information should be thorough to avoid misinterpretations.

     4. Substance Over Form: The essence of transactions should take precedence over their legal form.
        

• Relevance : Accounting information should be pertinent to the decision-making needs of its users. It should include both legally required disclosures and other important details. For example, reporting interest on borrowings without specifying the interest rate prevents users from assessing the cost of various borrowed funds and evaluating financing decisions. The relevance of information is best determined by the enterprise's management, guided by the principle of materiality.
  

• Understandability : Financial statements should be presented in a way that users can easily understand. However, relevant information must be disclosed even if it is complex and not easily understood by all users. Compliance with legal disclosure requirements is necessary regardless of complexity.

• Comparability : Comparability enables users to evaluate an enterprise's financial information against other periods (intra-firm comparison) or against other enterprises (inter-firm comparison). This requires consistent application of standardized accounting policies.

For accounting information to be effective, it must embody all these characteristics. While reliability and relevance are essential, their value is limited if the information lacks understandability and comparability.

After understanding the fundamental and qualitative characteristics of accounting information, it is clear how crucial accounting information and practices are. Just as knowing the alphabet is essential to understanding a language, comprehending various accounting terms is necessary to understand accounting as the language of business.

Our next article will cover the understanding of various accounting terms.