Key Characteristics and Principles of Accounting Information

Posted on Jan 26, 2025 in Other subjects

Key Characteristics of Accounting Information

Accounting information must comply with six characteristics:

Fundamental Characteristics:

  • Relevant
  • Reliable

Enhanced Characteristics:

  • Comparable
  • Understandable
  • Timely
  • Verifiable

Relevance

Information is relevant when it is useful for its users:

  • When it helps users to evaluate past, present, and future events.
  • When it helps users to confirm or correct prior decisions.
  • When it helps users to predict or forecast future outcomes.
  • When it helps users to assess all risks the company faces.

Reliability

Information is reliable when it gives a true and fair view of entities:

  • When it is complete.
  • When it is free of errors.
  • When it is neutral (unbiased).

Comparability

Information is comparable when it allows users to:

  • Compare financial information of a company through time (same company – different periods)
  • Compare financial information among companies of the same sector of activity (different companies – same period).

Clarity

Information is clear when it is unequivocal for users:

  • When it does not lead users to confusion or misunderstanding.
  • When it makes sense to users, helping them with decisions.

Users are supposed to be informed and knowledgeable about accounting and finance.

Timing

Information is timely when it is available to users in time to influence their decisions:

  • In general, the older the information, the less valuable it is for decision-making.

Usually, decision-makers require real-time information.

Verifiability

Information is verifiable when:

  • The calculations and accounting process can be replicated by external users.

Independent, knowledgeable, and informed users should be able to reach a consensus about verifiable information.

Constraints in Financial Reporting

Accounting information and financial reporting face three main types of constraints:

  1. Cost constraints
  2. Reliable measurement
  3. Balance among qualitative characteristics

Cost Constraints

Cost-Benefit analysis:

  • The benefits of reporting financial information should exceed the costs of doing so.
  • Financial information reported is selected by companies. It is not worthy (even possible) to provide all (detailed) financial information required by every external user.

Reliable Measurement

To take a reliable measurement of elements in the financial statements, companies:

  • Need the means and knowledge to properly measure them. (Material error).
  • Need to stay objective and neutral in their measurements and valuations. (Bias).

Balance Among Qualitative Characteristics

Some of the qualitative characteristics of accounting information may be seen in a trade-off situation:

  • More faithful information may be less comparable.
  • More comparable information may be less understandable.
  • More verifiable information may be less timely.

Accounting Principles

Generally Accepted Accounting Principles (GAAP)

  • Independent entity
  • Continuity
  • Historical cost
  • Stable monetary unit

In Spain, there are six accounting principles acting as the underlying assumptions of the accounting system:

Fundamental Assumptions:

  1. Going Concern
  2. Accrual Basis

Complementary Assumptions:

  1. Consistency
  2. Prudence
  3. Offsetting
  4. Materiality