This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Under this concept, financial information that prepared must relate to user's decision making. This helps the investors or other users of financial report to evaluate the past, present and future condition of the enterprise.
The usefulness of accounting information is depends on the relevant in users' decision-making. Relevant financial information helps users to evaluate business decision. And only the relevant information included in financial reports.
Relevance concept should be based on reliability concept, but there are no contradictions between the two concepts. Based on reliability concept, carry out relevance concept to satisfy the users desire by provide financial information for their decision-making needs.
For example, the information that user need are all shown in financial report.
Under this concept, important information cannot be omission and misstatement.
The omission or misstatement of financial information will affect the users who use the information. That the important of information large enough to influence decision-making.
On the other side, materiality concept also explain about grouped together small payments in one account. Because they are not the most important, so no need to specific them.
For examples, small payment such as postage, stationery and cleaning expenses can be grouped together as sundry expenses.201
Under this concept, the financial information should be prepared with no major errors, bias and must be truthfully. The accounting technical is use correctly.
All financial information should be record only when the transaction actually occurred. All the financial information must be reliable and the contents are integrity. The usefulness of financial information is based on reliability, if the financial information is unreliable, users and investors will make decision wrongly.
For example, the incorrect financial information will destroy an enterprise image, user of financial information will lose confidence and next time will not easily to believe.
This concept emphasis the financial information should be same with the actual transaction.
For example, all the amount of asset, liabilities and owner equity are record faithfully in financial report.
Substance over Form
Under this concept, the substance means the real economics, and form mean legal from. When preparing financial information should follow to the economic significance, not follow to the legal form. Follow this concept, financial information will be more reliable.
For example, some case such as, sale repurchase, leaseback and hire purchase are following this concept.
Financial information should be prepared follow this concept, financial information should be freedom from bias. Because biased information is not neutral and unreliable. Financial information that not neutral will influence the user decision-making.
For example, financial information should be prepared from a particular viewpoint but not based on objective facts.
Under this concept, financial information should be prepared carefully and cautiously. Assets, profit cannot be overstated and liabilities, expenses cannot be understated.
For example, fixed assets must be depreciated over their useful economic live so that asset will not be overstated.
Financial information should be prepared completeness with reliable and no omission.
For example, financial information is always prepared in completeness.301
The financial information had been prepared should can be comparable with other enterprise. In some country, government will fix the accounting method and all the enterprise must follow the same method. This will let comparability concept carry out more easily.
For example, financial information can have comparison within an entity or an entity to other entity.
All the similar accounting transaction or information of an enterprise in different accounting time period should be use the same accounting method to record. If an accounting method is used, than cannot arbitrary changes it. If really decide to change the accounting method, it should be described in the notes to financial statements or any other ways.
The characteristics of relevance concept and reliability concept should always be given consideration over the characteristic of concept comparability.
For example, only one depreciation method can be use in an asset, either straight method or double declining method. 153
Under this concept, financial information that prepared must be clear and easy to understand. So that, investors or other users of financial report can understand and use it.
The purpose of prepared financial report is to let users to use it effectively. So, understandability concept should be use when prepare financial information. So that, users can understands the content and meaning of the financial information well. This is the only way to improve the usefulness of accounting information, achieve the purpose of prepared financial reporting and satisfy the users desire by provide the useful information for them to use in make accounting decision.
For example, financial information is prepared follow the format of accounting report, so that all the user can be able to understand.126