Accuracy definition

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What is Accuracy in Accounting?

Accuracy is the concept that a stated value in the accounting records fully reflects all of the supporting facts. When the concept is expanded to the financial statements, it means that the information in the statements is fully valued and that all necessary supporting information has been fully disclosed. In order to produce accurate financial information, the accountant cannot skew information based on overly optimistic or pessimistic views of the desired outcome.

Why is Accounting Accuracy Important?

Accounting accuracy is one of the cornerstones of the accounting function, for the following reasons:

  • Credibility. The main product of the accounting department is its financial statements. If they are extremely accurate, then this boosts the credibility of the accounting department. With a high level of credibility, it is also much easier to attract funding from creditors, lenders, and investors.

  • Management decision-making. When the management team knows that the financial information it is being provided with is accurate, it can more readily make informed decisions based on that information. This results in quicker and more effective decision-making.

  • Financial analysis. Accounting information is used to develop business ratios and trend analyses, which in turn are used to determine the financial performance, financial condition, and cash flows of a business. Therefore, accounting accuracy is essential for the financial analysis that is applied to a business.

  • Legal requirements. A business has a legal obligation to maintain accurate financial records. When this is not the case, the business managers and owners could be liable, depending on the applicable laws and regulations. This is especially true in highly-regulated industries.

Accounting Accuracy Best Practices

There are several ways to improve accounting accuracy, which are as follows:

  • Maintain complete source documents. It is essential to maintain a detailed set of source documents that are properly recorded in the accounting system. This is a foundational issue; if this is not done, any subsequent best practices will have no effect on accounting accuracy.

  • Ensure proper training. Train the accounting staff in how to use the accounting system, so that they are recording transactions properly.

  • Install controls. Set up a comprehensive system of internal controls, such as approvals and the separation of duties, to ensure that transactions are processed appropriately.

  • Reconcile accounts. Regularly reconcile not only the bank account, but all significant asset and liability accounts, to ensure that they only contain valid transactions; all other items should be recognized through the income statement.

  • Review the financials. A member of management should review the financial statements for accuracy, preferably by conducting a trend line analysis for all income statement and balance sheet line items, to spot and investigate any irregularities.

When installed as a group, these steps can greatly increase accounting accuracy.