Faithful Representation:

Relevance in Financial Accounting

In accounting, the term relevance means it will make a difference to a decision maker.

For example, in the decision to replace equipment that has been used for the past six years, the original cost of the equipment does not have relevance. In other words, the original cost is irrelevant or is not relevant in the decision to replace the equipment. What will have relevance are the future amounts, such as the cost of the new equipment, and the savings that will occur when the old equipment is replaced.

Here's another expression of relevance: Costs that will differ among alternatives. Costs that will not differ among alternatives do not have relevance.

In order to have relevance, accounting information must be timely. Financial statements issued three weeks after the accounting period ends will have more relevance than financial statements issued several months after the period ends. Having timeliness and relevance may mean sacrificing some precision or reliability.

Read more about relevance in paragraphs 46-57 of the Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, issued by the Financial Accounting Standards Board. You may read it at no cost at

Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1, 700 accounting exam questions (and answers) when you upgrade to PRO.

YOU MIGHT ALSO LIKE
Accounting Standards Full | Accounting and Financial
Accounting Standards Full | Accounting and Financial ...
Accounting Equation - Video 1 - Financial Reporting Elements
Accounting Equation - Video 1 - Financial Reporting Elements
Is financial statement auditing still relevant?
Is financial statement auditing still relevant?
Share this Post

Related posts

Journal in Financial Accounting

Journal in Financial Accounting

MARCH 21, 2019

In accounting and bookkeeping, a journal is a record of financial transactions in order by date. A journal is often defined…

Read More
Importance of Financial Accounting in Business

Importance of Financial Accounting in Business

MARCH 21, 2019

Rigorous accounting requires time and effort, but your business won t remain viable without it. Jupiterimages/Comstock/Getty…

Read More