Define qualitative characteristics with example.
Correct Answer
The demand for accounting information by investors, lenders, creditors, etc., creates fundamental qualitative characteristics that are desirable in accounting information. There are six qualitative characteristics of accounting information. Two of the six qualitative characteristics are fundamental (must have), while the remaining four qualitative characteristics are enhancing.
The qualitative characteristics of accounting information are as follows:-
- Reliability: The first qualitative characteristic of accounting information is reliability. Reliability means the users must be able to depend on the information. It is believed that reliable information should be free from error and bias and faithfully represent what it is meant to represent.
- Relevance: The second qualitative characteristic of accounting information is relevance. It is believed that relevant, information must be available in time, must help in prediction and feedback, and must positively influence the decisions of users.
- Understandability: Understandability is the third most important qualitative characteristic of accounting information. Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them.
- Comparability: The last qualitative characteristic of accounting information is comparability. It is believed that it is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance, or for a particular reporting entity.