Information of any kind is relevant if it would act upon a determination. Accounting information is relevant if it would do a difference in a concern determination. For illustration, when Colorado Group Ltd issues fiscal statements, the information in the statements is considered relevant because it provides a footing for calculating future net incomes. Accounting information is besides relevant to concern determinations because it confirms or corrects old outlooks. Therefore, Colorado Group Ltd ‘s fiscal statements assist foretell future events and supply feedback about old outlooks for the fiscal wellness of the company. The relevancy of information is affected by its materiality. Information is material if its skip or misstatement could impact users ‘ determinations. Information that is immaterial need non be individually identified. For illustration, if Colorado Group Ltd sold a coathanger for $ 1 this would be considered immaterial ; the sale would be recorded in the accounting records although it would non be individually identified in the fiscal statements.
Reliability of information means that the information can be depended on. To be dependable, accounting information must be without undue mistake. Besides, the information must be a faithful representation of what it purports to be. If an entity ‘s fiscal statements study gross revenues of $ 20 million when it really had gross revenues of $ 10 billion, so the statements are non a faithful representation of the entity ‘s fiscal public presentation. Accounting information must be impersonal, that is, indifferent – it must non be selected, prepared or presented to favor one set of interested users over another.
To be dependable, information must besides be complete. Further. If information is to dependably stand for minutess and events, it is necessary to account for those minutess and events harmonizing to their substance and economic world, instead than merely sing their legal signifier. For illustration, if the entity transportations ownership of an plus but continues to bask the benefits of ownership, comptrollers do non ever acknowledge it as a sale. Reliability besides incorporates prudence, that is, cautiousness non to exaggerate income and assets, or to minimize disbursals and liabilities.
Let ‘s state that you and a friend kept path of your tallness each twelvemonth as you were turning up. If you measured your tallness in pess and your friend measured hers in centimetres, it would be hard to compare your highs. A transition would be necessary. In accounting, comparison consequences when different entities use the same accounting rules.
At one degree, accounting criterions are reasonably comparable because they are based on certain qualitative features, basic rules and premises. However, criterions still let for some fluctuation in methods. For illustration, there are different ways to mensurate inventory/goods held for sale. Often these different methods result in different sums of net income. To do comparing across entities easier, each entity must unwrap the accounting methods used. From the revelations, the external user can find whether the fiscal information is comparable and seek to do accommodations. Unfortunately, change overing the accounting Numberss of entities that use different methods is non every bit easy as change overing your tallness from pess to centimetres.
One factor that can impact the ability to compare two entities is their pick of balance day of the month. Most entities choose 30 June as their balance day of the month, but other day of the months are besides used. For illustration, expression at Colorado Group Ltd ‘s balance day of the month. Retailers frequently use balance day of the months that coincide with the terminal of a hebdomad. However, this pattern consequences in some old ages holding 52 hebdomads whereas in other old ages ( and for other entities ) fiscal statements may be for a 53-week period.
Users of accounting information besides want to compare the same entity ‘s fiscal consequences over clip. For illustration, to track Colorado Group Ltd ‘s net income over several old ages, you would necessitate to cognize that the same rules have been used from twelvemonth to twelvemonth ; otherwise, you might be ‘comparing apples with oranges ‘ . Comparability is non satisfied unless an entity uses the same accounting rules and methods from twelvemonth to twelvemonth. Thus, if an entity selects one stock list accounting method in the first twelvemonth of operations, it is expected to go on to utilize that same method in wining old ages. When fiscal information has been reported on a consistent footing, the fiscal statements permit meaningful analysis of tendencies within an entity.
An entity can alter to a new method of accounting if direction can warrant that the new method produces more meaningful fiscal information or if it is required by a alteration in accounting criterions. In the twelvemonth in which the alteration occurs, the alteration must be disclosed so that users of the statements are cognizant of the deficiency of consistence.
Information contained in all-purpose fiscal studies should besides be apprehensible. But whether information is apprehensible depends on the capablenesss of the single user. In keeping this qualitative feature, preparers should be aware of users of all-purpose fiscal studies who have the proficiency to grok the significance of accounting patterns, i.e. users who understand the consequence of alternate accounting methods on fiscal statements. It is non practical to necessitate fiscal statements to be apprehensible to novitiates. Entitles frequently need to describe on complex minutess that can non ever be simplified to the extent that person with no cognition of accounting could understand them.