Business owners can use accounting information to conduct a financial analysis of their companies’ operations. Accounting information often has quantitative and qualitative characteristics. Quantitative characteristics refer to the calculation of financial transactions. Qualitative characteristics include the business owner’s perceived importance of financial information. Business owners often require financial information when making business decisions. Incorrect or inappropriate information can hamper decision-making or cause business owners to make incorrect assessments about their companies.
Accounting information must be understandable. This is an important qualitative characteristic for small business owners. Many small business owners do not have a strong accounting background. Financial information that is too technical or cannot be understood by a layperson can be ineffective for business owners. Small business owners often use professional accountants to complete various accounting functions. Business owners should choose an accountant who can prepare information in an easily understandable manner.
Business owners need accounting information that is applicable to the business decision at hand. They can request financial statements, accounting schedules, reconciliations or cost-benefit analysis. For example, cost allocation reports may not provide sufficient information for business owners who must make a decision on hiring employees. Cost allocation usually refers to applying business costs to goods or services produced by the company, which has very little to do human resources. Business owners should carefully request and review accounting information to ensure it provides the most useful information for the decision-making process.
Accounting information should relate to a specific time period or contain information regarding individual business functions. Business owners often conduct a trend analysis when reviewing financial information. The trend analysis compares historical financial information to the company’s current accounting period information. Irrelevant historical information can severely distort the trend analysis process. For example, reviewing the production process for widgets requires relevant information on the cost of materials for widgets. Cost information on the materials to produce cogs would be irrelevant.
Accounting information must be reliable, so that business owners can be reasonably assured that accounting information presents an accurate picture of the company’s financial health. Business owners often use accounting information to secure external financing for their business. Information that is not reliable or accurate may cause lenders and investors to question the business owner’s management ability. Business owners may also struggle to secure external financing with poor accounting information.
Comparability allows business owners to review their companies' accounting information against that of a competitor. Business owners use comparison to gauge how well their companies operate under certain market conditions. Owners often use the leading company of an industry for the comparison process. These companies usually have the most efficient and effective business operations. Non-comparable accounting information can make this a difficult process. For example, business owners should consider preparing financial statements according to standard accounting principles. The statements can then be compared to other company’s financial standard prepared in a similar manner.
Consistency refers to how business owners and accountants record financial information in a company’s general ledger. Business owners need to ensure financial transactions are handled the same way. Inventory purchases should be recorded the same way as yesterday, today and tomorrow. This helps companies create accurate historical records and limit the amount of financial accounts or journal entries included in their general ledgers.
- "Accounting"; Charles T. Horngren, Walter T. Harrison, Jr.; 2007