Posted at 12.14.2018
Nowadays the role of accounting is vital in business because it help the business to expand and extend. Accounting is the process of identifying, calculating, recording and interacting economical information. These steps help the director to make financial decisions to boost their business. Internal users use financial information to plan, control and make decisions predicated on the situation and resources of business such as salary cost or cost of goods sold. Furthermore, the exterior users such as stockholders, suppliers and government's company also need the financial statement from the business enterprise such as Basic Purpose Financial Record (GPFR) or Special Goal Financial Record (SPFR). In accounting information's conceptual construction, there are a few qualitative characteristics which will make information useful such as understandability, relevance, trustworthiness and comparability. This article will critical analyze the feature of accounting information in regard to understandability, relevance, trustworthiness and comparability.
The first important characteristic of accounting information to make it useful is understandability. Understandability means that "users of accounting information can be assumed they have reasonable knowledge about economic activities and also to have the ability to read a financial report" (Ahmed Riahi-Belkaoui, 2004, p186). By this assumption, the users of financial record must have reasonable amount of financial knowledge to help them to learn the report. On the other hand, even although users have responsibility for understanding financial article, the business must definitely provide the understandable financial report. A good example of this is there are many quarrels against the new accounting method when the business enterprise want to replace the old systems because you will see many users of financial record who can not adapt to understand the new accounting method. As a result, the financial record will be unproductive even although new method is more useful for decision making. The discussion also state that the "understandability is more important than relevant". However, the business enterprise nowadays is very complex, so the users must have some advisers to learn the financial reviews for them if they have difficulty to read the reports. For instance, the capital providers are unfamiliar with activities the entity will need to hedge its contact with financial risks in order that they will have difficulty to understand the financial statement which explain the visibility activities. This information, however is relevant to users who making the decisions (Financial accounting standard plank, 2008). Finally, the users of accounting information will need to have reasonable understanding of financial activities and able to read the accounting report. Moreover, the financial statement is useful when it is understandable for the users.
Relevant also is a very important characteristic of accounting information since it is the first major qualitative characteristics of Hierarchy of Desirable Characteristics of Accounting Information (no creator, 2007). Relevance is identified when the information "is usefully from the action it was created to facilitate or the effect it was created to produce" (Walter B. Meigs, 1979, p37). Therefore, relevant information make a difference manager's decisions by changing or confirming their decisions about the result of activities or incidents. A couple of 3 the different parts of relevance that happen to be predictive value, feedback value and timeliness. In the accounting's conceptual framework, relevant information pays to for the investors, creditors to judge days gone by, present and future of activities (predictive value) and verify their decision (responses value). The relevant information also has timeliness because the relevant information will certainly reduce their usefulness if the decision makers wouldn't normally be made within enough time limit. In conclude, the relevant information is very helpful for the users because they can make the decisions predicated on the past, present and future of activities.
Thirdly, accounting information will not be useful without dependability. Stability in accounting information is defined as the info is "truthful, correct, complete and capable of being confirmed" (Wikianswers, 2008). The key reason why accounting information should be reliable is that the users will rely on the info to make decisions. A couple of three component characteristics in reliability which are verifiability, representational faithfulness and neutrality. The accounting must be verified to confirm the reliability of information so they can audit or change the information. In addition, the representational faithfulness is defined as the agreement between the measure and real events, so that the information will be truthful and exact. Furthermore, the last component feature of reliability is neutral. Neutral information is "clear of bias toward attaining some desired end result or inducing a specific mode of tendencies" (Ahmed Riahi-Belkaoui, 2004, 187) which means that the purport of the information should be afflicted from predetermined results. Finally, if the information doesn't have reliability, the business cannot make decisions predicated on the information or they could make improper decision which will lead to the negative consequence.
The last attribute of accounting information is comparability which is also the secondary quality. Comparability is simply allows the business enterprise or users of information to make a comparison between your variable information. For instance, there are three companies which using different solution to estimate the depreciation. The first two companies using direct brand method, whereas the last one using "accelerated" depreciation method. As a result, the users of information barely decide based on the effect because three companies using different method. It should be easier if three companies using the same method to compute the depreciation (Ahmed Riahi-Belkaoui, 2004, p187). Consistency differs from comparability because consistency means that the financial record can be likened within a single company in one accounting's period to another. For example, the company may want to change the accounting's system, so that it is hard to compare the information in two periods because they're using different accounting method. Therefore, the accounting information should be comparable, so the users can make decisions about the future by contrasting the past's information and the present's.
In bottom line, the accounting information will be useful to the users when they have four characteristics that are understandability, relevance, consistency and comparability. Understandability means that the accounting information should be reported in keeping ways, so the users who already have understanding of reading accounting statement will understand the article. Furthermore, the accounting information should be relevant, so that the users can make future's decisions based on days gone by and the present. In addition, stability also appears to be very important characteristics of accounting information because if the information is inaccurate or untruthful will lead to incorrect decisions. Last but not least, the accounting information should be comparable so that the users can compare the information every year to make the appropriate decisions. Therefore, accounting information is vital for the users since it will affect the business enterprise, and accounting is needful nowadays.