The entire concept of financial accounting is to create and compile useful information for investors, creditors, and other decision makers outside the business entity. But in order for financial information to be useful in the decision making process, it must be understandable.
Understandable financial information is quality information that investors and creditors can use to for investment and credit decisions. After all, it wouldn’t make sense for companies to issue financial information that no one can understand or use. It would be a waste of time.
Conversely, financial information is not tailored to everyone. GAAP requires financial information to be understandable to a reasonably informed person. That means that the average, uniformed person might not understand a set of financial statements. Businessmen and women along with investors and credits should however clearly understand the information presented in the financial statements.
That is why the FASB created the qualitative characteristics of financial information. These characteristics describe what useful information is and how it relates to financial decision-making. The main qualitative characteristics of accounting information are:
All accounting information should possess these qualities in order for it to be useful to outside users.