Qualitative Characteristics of Financial Statements

Generally Accepted Accounting Principles (GAAP) requires that the financial Statements of company should include all of those Steps in the Accounting Cycle which are necessary for the fair representation of financial statements of the company businesses.  These steps are Income Statement or Statement of Comprehensive Income, Balance Sheet or Statement of Financial Position, Statement of Changes in Equity and Notes to the Accounts or Footnotes.

For Fair Representation of Financial Statements and to provide true and fair view of these statements to users of financial statements, qualitative Characteristics of Financial Statements is must.

Following are the Most Important Quality Factors of these Statements:

Ø Relevancy

Financial Statements whence published are provided to different users. These users may include:

Employees, Government, Shareholders or Owners of an entrepreneur, Suppliers, Customers, Financial Institutions, Investors, and other interested users. All of these groups need such information for which they are interested and are relevant to them and also they are willing to get it from theses financial statements of the company. So, these Statements must be relevant and are prepared to provide the necessary information and to fulfill the needs of these interested groups.

Ø Understandable

The Understandable quality is must. A common person can easily understand the various important points of the business of the entrepreneurship. A Professional person can easily understand various events and points of financial statements but for common users like customers, it is very difficult to understand various Accounting Concepts.

 An Example of making understandable is to provide Graph, Diagrams and Summary and explanation of important points so that a common person can be confused in technical terms and can easily understand the concepts of those important points.

Ø Reliability

Information to be presented must give confidence to users that it gives true and fair view of financial statements. All the information must be accurate and free from Errors and Frauds.

You may be also interested in Rectification of Errors.

Ø Completeness

It means that all those information must be provided to users that are Material in Nature. In other words, we must follow Materiality Concept while preparing financial statements. The purpose of completeness is to provide real and true picture of the business of Entrepreneur or company.

Ø Objectivity

Here Objectivity means that information provided in financial statements should be un-biased and not given according to wishes of parties preparing it. The company should not favor any parties and defend them unfairly.

The most important example is Performance and Profitability of company. Performance and Profitability of company should be objective and it should not mislead the users of financial statements.

Ø Timeliness

Timeliness means that information provided in should be prepared on time and according to accounting period of company. Also the information should be updated and consists of most recent Accounting Period.

An Example is that when investors are more interested to invest in the business of entrepreneur. In this case they are more interested in updated and recent information provided in financial statements.

Ø Comparability

In Comparability, we compare current accounting period with the previous accounting periods. Same types of businesses are compared with each other in order to check standard of performance in the same line of businesses.

An example is when investors are more interested in Profitability Ratios of the business of the company.

So, it is all about Qualitative Characteristics of Financial Statements and these are must for Fair Reporting of the business of Enterprise or Entrepreneur or Company.