As the decision maker for your small business, understanding basic bookkeeping and accounting terms isn’t just helpful—it’s necessary. “Relevance" and "reliability" are two hot-button terms to be familiar with when you’re reviewing financial reports and statements with your accountant.
The consequences of not understanding basic accounting terms could cause serious problems—and worse, you could potentially overlook them. Luckily, these terms are easy to understand. So, let’s look at what makes financial information relevant and reliable and why both are important.
The Financial Accounting Standards Board (FASB) defines relevance in accounting as
information that is “capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations.”
How do you know if the reports and statements your accountant reviews with you are relevant? If you're unsure, just ask your accountant, "Why and how is this information relevant?"
Things for You and Your Accountant to Consider About Relevance
Once you start to wrap your head around the details in front of you, dig deeper with follow-ups:
1. Past Meets Future
How does this past information help me predict our financial future? Does it have predictive value?
2. Putting Goals in Reach
What are our future interests, and what do we need to do—based on this information—to reach our goals?
3. Proving and Disproving
Does this information confirm or correct our prior expectations? What did we do right or wrong?
But keep in mind that for information to be relevant, it needs to be timely. There's no use going over bookkeeping and accounting information that is outdated or even premature—it won’t help you make decisions.
Example: If your business has a standout Q3, this intel just might sway investors and shareholders, signaling more good things to come in the next quarter. As a result, investors might put more money into the company.
Relevant information is just one side of the proverbial coin. Reliability is the other side. You'll want to make sure your accountant is providing you with reliable information. The FASB defines reliability in accounting as, "... an accounting description or measurement that is verifiable and representationally faithful."
Questions to Ask Your Accountant About Reliability
Reliable information satisfies three basic criteria in bookkeeping and accounting that makes it trustworthy:
1. Is the Information Verifiable?
Information is considered verifiable when similar results are obtained through independent measures using the same methods.
Example: Imagine if several independent auditors review your financial statements. They should arrive at the same conclusions about the information in front of them.
2. Is the Information Faithfully Represented?
Faithful representation means your information is accurate, and the numbers and descriptions on your reports and statements should match what really happened.
Example: Let’s say your sales last month were $356,879. Any reporting should reflect this amount—no more, no less.
3. Is the Information Neutral?
Reliable information should also be unbiased. Your company cannot be selective about what information it shares to favor one party over another. Our advice? Transparency is the best policy.
Example: If your company is embroiled in lawsuits, this must be indicated in report notes so decision makers are aware. You shouldn’t hide this information because it impacts the value of your company.
Get Relevant and Reliable Information from Your Accountant
When you meet with your accountant, make sure the information they’re sharing is both relevant and reliable. For every report or statement presented to you, ask yourself (and them) if the information is helpful for decision-making and building your business’s future.
Check these relevancy boxes:
- How does this past information help me predict our financial future?
- What do we need to do to reach our goals?
- Does this information confirm or correct our prior expectations?
And check these reliability boxes:
- Is the information verifiable?
- Is the information faithfully represented?
- Is the information neutral?
Don't waste your time on reports that are outdated, premature, or inaccurate. Having the best information available—both relevant and reliable—impacts the choices you make for your business as well as the confidence your stakeholders have in you to grow and achieve your goals.
Need to get your house in order? Get in touch with us to discuss your bookkeeping and accounting needs, and download The Complete Guide to Outsourced Accounting Services for tips as you begin your journey.