Understandability definition — AccountingTools (2024)

FAQs

What does understandability mean in accounting? ›

Understandability is the measure of how easily an individual can comprehend a company's financial report or accounting information.

The enhancing qualitative characteristic of understandability means that information that may be difficult to understand is made more useful by presenting and explaining it as clearly as possible.

Short Answer. The two fundamental qualities of useful accounting information are relevance and accuracy.

Relevance means that information is "capable of making a difference in the decisions made by users" (CPA Canada, 2019, QC2.

Accounting is the systematic process of recording, classifying, summarizing, interpreting and communicating financial information to its users.

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.

Enhancing qualitative characteristics

If financial information is to be useful then it must be relevant and must also faithfully represent what is being reported. The usefulness of this information is enhanced if it is comparable, verifiable, timely and understandable.

—the ability to be useful in decision making. Understandability. means that users must understand the information within the context of the decision being made. This is a user-specific quality because users will differ in their ability to comprehend any set of information.

Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.

Qualitative characteristics of accounting information that impact how useful the information is: Verifiability. Timeliness. Understandability.

What are the four qualities of good accounting information? ›

This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.

Relevance and reliability are primary characteristics because if information is not helpful for decision making or not providing accurate information then understandability, timeliness of information is of no use.

The primary qualities that make accounting information useful for decision making are reliability and comparability.

In accounting, understated means that a reported amount is less than the actual, true amount based on the accounting rules. In other words, the reported amount can be described as: Incorrect. Too low. Less than it should be.

This assertion relates to all financial information and disclosures being clear and easily understandable by the financial statement user. The primary concern is that that financial statements are unclear or misleading.

If a company wants to take a loan from a bank, then the bank will want to know first whether the company will be able to pay them back the loan with interest. Therefore, the company's financial statements should be relevant for the bank in making its decision regarding granting a loan to the company.