Effects of bias in terms of accounting, Accounting Basics

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Q. Effects of bias in terms of accounting?

Where there is no correspondence the cause may be (a) bias or (b) lack of completeness.

- Effects of bias. Accounting measurements enclose bias if they are consistently too high or too low. Accountants create bias in accounting measurements through choosing the wrong measurement method or introducing bias either deliberately or through lack of skill.

- Completeness. To be free as of bias information must be sufficiently complete to ensure that it validly represents underlying events and conditions. Completeness means disclosing all important information in a way that aids understanding and doesn't mislead. Firms are able to reduce the relevance of information by omitting information that would make a difference to users. Currently complete disclosure requires presentation of an income statement, a statement of cash flows, a balance sheet and necessary notes to the financial statements and supporting schedules.

As well required in annual reports of corporations are statements of changes in stockholders' equity which contain information included in a statement of retained earnings. Such statements should be complete with items properly classified and segregated such like reporting sales revenue separately from other revenues. Required disclosures perhaps made in (a) the body of the financial statements (b) the notes to such statements (c) special communications and/or (d) the president's letter or other management reports in the annual report.

Another aspect of completeness is completely disclosing all changes in accounting principles and their effects. Disclosure must include unusual activities (loans to officers) changes in expectations (losses on inventory) depreciation expense for the period long-term obligations entered into that aren't recorded by the accountant (a 20-year lease on a building) new arrangements with certain groups (pension and profit-sharing plans for employees) and major events that occur after the date of the 11APB APB Opinion No. 20 Accounting Changes New York: AICPA July 1971). Statements loss of main customers Firms should also disclose accounting policies major principles and their manner of application followed in preparing the financial statements. For the reason that of its emphasis on disclosure we often call this aspect of reliability the full disclosure principle.


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