- Accounting Produces Financial Information presented in the reports.
- Information is used to make decisions - the sole purpose of information
- Therefore, the information you provide as an accountant should be of QUALITY.
- Poor quality information will lead to bad decisions.
How do you ensure the Financial information is valuable?
Statement of Accounting Concepts 3 (SAC3) states that a financial report should have these characteristics or qualities to make the information valuable:
- Should be able to compare one report to another of the same business and
- With the reports of other similar organisations.
- The comparisons will help us in making decisions or choices.
- How to achieve this?
- Accounting methods and rules must be applied in a consistent way.
- You can't be changing the rules every time
- That is, use same methods every time:
- Depreciation method: Straight line and Reducing Balance
- Accounting: Cash and Accrual
- Users must be informed at once if changes in methods or rules have occurred.
Data that is pertinent (applicable, right, appropriate, essential, related, correct, important, significant, vital or relevant) to the business for that period must be recorded.
What ensures Relevance?
- Entity principle:
- Only the data pertaining to that particular business: not of the owner or others.
- If a data’s inclusion will help in decision-making; that data is material.
- If a data’s inclusion will make no difference to the decision-making than it is not material and can be excluded.
- Eg if a building that cost $100,000 increased in value by $100; is it appropriate to revalue the building to $100,100? No, in this case the $100 increase is not material. It won’ affect the decision making.
- matching principle
- The revenue earned must match the expenses in the same period.
- If you recognised revenue in one reporting period and its related expense occurs in another; the revenue and expense are not matching
- Reports must be trustworthy.
- Can be trusted and relied upon.
How is this made possible?
- Verifiability principle
- All data recorded shall have a proof. This proof is given by the documents generated at the time of the transaction:
- Cash Receipts
- Cheque Butts
- Sales and Purchase invoices
- consistency principle
- methods and rules of accounting must be applied in a consistent way
- Any item which can influence the decisions of the users shall be recorded.
- rounding of cents to the nearest dollar will not affect decisions, hence, is not material
- Note – all transactions are material. ie all transactions must be recorded.
- The users should be able to understand the financial reports that accountants prepare.
- It must be prepared using the standard formats and supported with supplementary notes.