Qualities/Limitations of Accounting Information

Qualities/Characteristics of Accounting Information:

The primary objective of financial reporting is to provide useful information for making business decisions. A piece of good accounting information must have the following qualities in order to satisfy the user’s needs:

1. Reliable: Reliable information should be free from error and bias and faithfully represent what it is meant to represent.

2. Verifiable: If independent observers, using the same methods, obtain similar results, then the information is verifiable

3. Timeliness: For accounting information to be relevant, it must be timely, i.e. it must be available to the decision-makers before it loses its capacity to appropriately inform decisions.

4. Relevance: Accounting information is relevant if it can provide helpful information about past events and help in predicting future events, such as future cash flows, or in taking action to deal with possible future events.

5. Comprehensiveness: Accounting information must be detailed enough for thorough understanding. When information is included in general-purpose financial reports, there is an obvious need for the users of those reports to be able to comprehend their meaning.

6. Comparability: Comparability is the degree to which accounting standards and policies are consistently applied from period to period. There should be no change in the basis for the preparation of the accounting information so that it will be easy to compare the results of operations over such accounting periods. It results when different companies use the same accounting principles and the financial statements of each company are easy to compare.

Limitations of Accounting:

1. Transactions are recorded in monetary terms, so there is no information as to the usefulness, size, or quantity of transactions. Information that cannot be measured in monetary terms is not recorded in accounting and this makes accounting information incomplete

2. It is historical in nature, i.e. the recording is after the event. This reduces the relevance of accounting information in making current decisions

3. It rigidly follows unrealistic concepts and conventions.

4. Possibility of error in accounting can reduce the usefulness of accounting information.

5. Where precise information is not available accountants rely on estimates which may be inaccurate for decision-making.

6. Some businesses window-dress their financial statements thereby misleading users.

7. Businesses use different accounting policies which makes comparisons misleading.