Qualitative Attributes of Accounting: Nature of Accounting

 

NATURE OF ACCOUNTING

Accounting is the financial information system.

It measures, processes and communicates financial information for decision makers.

Business activities are identified and measured in terms of money.

Then processed and finally communicated to the various groups of users.

Without accounting, the financial transactions are only data.

They are converted to information by the accounting processing system.

The Nature of Accounting can be defined in two ways:

(A) Qualitative Attributes of Accounting  

(B) Quantitative Attributes of Accounting

 

 

(A) QUALITATIVE ATTRIBUTES OF ACCOUNTING

Qualitative means related to quality and attribute means characteristic.

The qualitative attributes describes the nature of accounting.

There are two features of qualitative attributes of accounting; they are primary (fundamental) and secondary (enhancing).

(a) Primary (fundamental) are relevance and reliable

(b) Secondary (enhancing) are understandability, comparability, verifiability and timelines.

 

Relevance

Relevance is directly and closely related with the concept of useful information.

Decision taking information must be included in financial statement.

Unnecessary and irrelevant information should not be included in financial statements.

For example: The information related to the rate of dividend paid by a company in previous years is relevant information for the investors; it provides a basis for forecasting future dividends.

 

Reliability

Reliability suggests that the information must be factual and verifiable.

Accounting information can be verified from source documents such as cash memos, purchase invoices, sales invoices, correspondence, agreement, property deeds etc.

Some information presented in financial statement may be more reliable than others.

For example, current assets are more reliable than depreciation on machinery because current assets are more important than depreciation to take decisions.

The financial information should have these qualities:

Neutrality

Substance over form*

Prudence

Completeness

 

Keep in mind

*Substance over form means financial statement should give a complete, relevant, and accurate picture of transactions and events. If an entity practices the substance over form concept, then the financial statements will show economic substance rather than the legal form of transactions.

Reliability may suffer when an accounting method is changed to gain relevance and vice versa

 

 

Understandability

Accounting information should be presented in a simple and logical manner that they are understood easily by their users.

Accounting users are shareholders, investors, lenders, creditors, employees etc.

A person who does not have knowledge of accounting terminology, he should also be able to understand them without much difficulty.

This can be done by giving relevant explanatory notes to explain the information given in financial statements.

For example, explanatory notes are method of valuation of inventory, method of depreciation, description of contingent liabilities, explanation of reserves, disclosure of events occurring after balance sheet date etc.

These explanatory notes make the financial statements more useful and understandable.

 

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Click on link for YouTube videos topic wise :
Accounting Equation	http://tiny.cc/c89jkz
Basic Journal Entries in Nepali	http://tiny.cc/uaakkz
Basic Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger Account	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
Trial Balance and Adjusted Trial Balance	http://tiny.cc/c59jkz
Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
Click on link for YouTube videos chapter wise:
Financial Accounting and Analysis (All videos)	http://tiny.cc/jlersz
Accounting Process	http://tiny.cc/mlersz
Accounting for Long Lived Assets	http://tiny.cc/plersz
Analysis of Financial Statement	http://tiny.cc/slersz

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Comparability

Comparability is very useful quality of the financial accounting.

The financial statements should contain the figures of previous year along with the figures of current year to compare with the past performance.

Similarly, the financial statements should be prepared in such a way that the profitability and financial position of the concern may be compared with the other concerns of the similar type.

Comparison reveals the strong and weak points of the business entity. Comparison is possible when the different firms in the same industry adopt the same accounting principles from year to year.

For Example: If diminishing balance method of charging depreciation is selected, it should not be changed from year to year. Similarly, the method of valuation of stock should also be consistently the same from year to year.

 

Verifiability

Verifiability is the extent to which information is reproducible given the same data and assumptions.

For example, if a company purchases equipment worth $/₹/Rs 100,000 and told an accountant the purchase cost, salvage value, depreciation method, and useful life, the accountant should be able to maintain accounting properly.

If accountant cannot maintain accounting information, the information is considered not verifiable.

 

Timeliness

Timeliness means how quickly accounting information is available to its users.

If accounting information is not available when it is needed, information becomes useless for the users.

In this condition, information lacks relevance and becomes less useful information for decision-making.

For example, if a company issues its financial statements after one year of accounting period, users of financial statements would find it difficult to determine how well the company is doing in the present.

Therefore, Timeliness is important for accounting information because delay information cannot compete with other information.

 

Keep in mind

There are some secondary qualitative attributes like conservatism, verifiability, materiality, neutrality consistency

 

Faithful representation

Accounting aims at preparing those financial statements that depict the true and fair view of profitability, liquidity and solvency position of an enterprise. Application of appropriate Accounting Standards normally results in financial statements portraying true and fair view of information of an enterprise.

 

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