Accounting Concepts and Qualitative Characteristics of Financial Reports

The essay covers the accounting concepts required for preparing financial statements and the qualitative characteristics to enhance the information of financial statement for purpose of decision-making process for company and investors.

Financial Reports

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
a. Accounting Concepts for preparing financial statements........................................................3
b. Qualitative characteristics of financial reports:.......................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................1

INTRODUCTION
The essay is about the accounting concepts and characteristics that are related to financial
statements. The essay covers the accounting concepts required for preparing financial statements.
It also consists of the qualitative characteristics to enhance the information of financial statement
for purpose of decision-making process for company and investors.
MAIN BODY
a. Accounting Concepts for preparing financial statements
Accounting concepts are used as the rules and procedures for recording any event and
preparation of financial statement. Financial statement are the written records that states the
activities and financial performance of business (Hasanaj and Kuqi, 2019). The following
concepts are used for preparing financial statements:
Money Measurement Concept: Business use accounting for only those items that can
be expressed in monetary terms. Money is a measurable thing that makes business to record the
inflow and outflow of items easily. In running of business a company performs many activities
related to monetary or non monetary terms (Atshana, Hassana and Saeed, 2020).
For example: Sale or purchase of goods of €2500 can be measured in monetary terms and
hence they are recorded in the books of accounts. Likewise, sincerity, loyalty, of employees can
not be measured in terms of money. Hence, won't be recorded in books of accounts although
they affect the profit and losses of business activities.
Accrual Concept: Accrual concept states that the transaction should be recorded when it
happened irrespective of actual cash-flow of transaction is received. It means something that
becomes due especially when the transaction is made but money is yet to paid or received. The
accrual concept assumes that revenue is realized at the time of sale or purchase of goods
irrespective of when the cash will be received or paid (Christofzik, 2019).
For example: sale of good took place on 15/03/2021 and payment is not received until
20/07/2021. So the transaction must be included in books of 31/03/2021.
Conservatism: Conservatism concept means that a transaction will be recorded in books
only when it is certain that it will be realized in near future. It provides guidelines to accountants
on how to record the transaction with proper verification after recognizing the uncertainty

outcomes of revenues and expenses that can our in financial statements (Hsieh, Ma and
Novoselov, 2019).
For example: Goods purchased for €2000 earlier but price is increased to €2500. The
accountant must write down the value of asset to be €2000 in financial statement. The profit will
be recorded when the inventory is sold.
Accounting Period Concept: An accounting period concept states the time covered by
company for making financial statement. This period defines the time period over which the
business transaction took place are recorded in statements The transaction will be recorded in
books between the period of April to March of that year (Amadi and Ejiogu, 2021).
For example: Sale of goods took place on 10/07/2021 of €3500 will record in financial
calendar till 31st March 2021.
Equity Concept: Equity concept states the value would be return to owners of business
after all assets are liquidated and all debts are paid off. The book value of equity is calculated as
the difference between assets and liabilities of the balance sheet while the market value of equity
is calculated on the current share price going in market (Easton and et.al., 2018).
Example: Telecom Balance sheet shows the asset side balance to be €100500 and liability
side balance to be €90500 Equity will be calculated as the asset – Liabilities = €100500 -
€90500. The equity will be €10000. Or the market share of company is €10000
b. Qualitative characteristics of financial reports:
Qualitative characteristics of financial reporting make it easier for both management and
investors to utilize financial statements to in decision-making process (Herath and Albarqi,
2017). It tells how useful the information is for company.
Verifiability refers to ensure the information is faithfully represented the purpose of
report and also the technique use for measurement is used without any error or bias. Verification
states that the result measure should be correct irrespective of what measure is used. The
information is verified when the evaluators who have knowledgeable confirms the cause by
coming with same result. Verification done in 2 ways: Direct verification which states the
amount is used for verifying data. Indirect verification states that input or output operations are
used for verifying the data. Like company purchase machinery and tell accountant the purchase

price, salvage cost and depreciation amount. Accountant will use the information to reproduce
the same result, if not the information given is not verified.
Timeliness states that the information of item must be received by the accountant at right
time before it looses its ability in making decisions. If information given after the long time the
event took place or not available when needed then it will have no value for future action.
Information should be provided with sufficient timeliness manners to give a clear and
meaningful picture to investors. Company provides the financial data after the accounting period
of company, this will determine how well the company is performing in difficult manner (Viet,
Hung and Thanh, 2018.).
Understandability means that information provided by company should be qualitative in
nature and is capable enough to discover the meaning of information that it is trying to show.
User of this information are assumed to have sufficient knowledge to understand the information
properly. If the provided information is classified and clearly represented, it will enhance the
understandability for user. If company presents the information according to specific user, it will
lead to bias for other users (Wadesango and Ncube, 2020).
Comparability refers to the ability of user to differentiate between the similarities and
difference between two financial periods to make good decision toward company. It is the degree
to which the accounting principles and policies are applied from one period to another in making
financial statements. This will enables the user to draw the insightful conclusion of company's
performance. If information is comparable enough it will assist in determining strength,
weaknesses and opportunities for future (Chen and Gong, 2019).
CONCLUSION
From the above essay it can be concluded that financial statement should consist of things
that are in money terms. Item should be recorded in books as it took place in a particular
financial year. The financial statement should be quite comparable and understandable in nature
and information should be verified.

REFERENCES
Books and journals
Amadi, C. and Ejiogu, A., 2021. Introduction to Financial Accounting. In Financial and
Managerial Aspects in Human Resource Management: A Practical Guide. Emerald
Publishing Limited.
Atshana, A.A., Hassana, M.G. and Saeed, H.N.A.Z.F., 2020. THE QUALITY OF
ACCOUNTING INFORMATION REDUCES FINANCIAL FAILURE. PalArch's
Journal of Archaeology of Egypt/Egyptology. 17(7). pp.15587-15613.
Chen, A. and Gong, J.J., 2019. Accounting comparability, financial reporting quality, and the
pricing of accruals. Advances in accounting. 45. p.100415.
Christofzik, D.I., 2019. Does accrual accounting alter fiscal policy decisions?-Evidence from
Germany. European Journal of Political Economy. 60. p.101805.
Easton, P.D., and et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements. Humanities and Social Science
Research. 2(2). pp.p17-p17.
Herath, S.K. and Albarqi, N., 2017. Financial reporting quality: A literature
review. International Journal of Business Management and Commerce. 2(2). pp.1-14.
Hsieh, C.C., Ma, Z. and Novoselov, K.E., 2019. Accounting conservatism, business strategy, and
ambiguity. Accounting, Organizations and Society. 74. pp.41-55.
Viet, H.T., Hung, D.N. and Thanh, N.T., 2018. The study of factors affecting the timeliness of f
inancial reports: The experiments on listed companies in Vietnam. Asian Economic and
Financial Review. 8(2). pp.294-307.
Wadesango, N. and Ncube, C., 2020. Impact of quality of financial reporting on decision-making
in state universities in Zimbabwe. Journal of Nation-Building and Policy Studies. 4(1).
p.97.
1

2