VCE Accounting Unit 3. Video of this presentation can be found on my YouTube channel here https://www.youtube.com/channel/UCf5jyuJoYwie8tWfvjEc0zg.

1. 1.5
UNDERSTANDABILITY

2. Video of this presentation at…
YouTube Channel for VCE Accounting

3. © Michael Allison. Author’s permission required for external use.
1.5 UNDERSTANDABILITY
The Rules of Accounting
Relevance
Reliability
Comparability
Understandability
Entity
Historical cost
Going concern
Reporting period
Monetary unit
Conservatism
Consistency
Qualitative Characteristics Accounting Principles

4. © Michael Allison. Author’s permission required for external use.
Understandability
 Accounting reports often have complex numbers and terms in them. So
information must be understandable for the end user
 So what does understandable mean?
1.5 UNDERSTANDABILITY
Definition:
Information is understandable if:
• Users can comprehend its meaning easily (assuming a reasonable
knowledge of business and economics)
• This doesn’t mean excluding complex information but, instead, explaining
it in a manner that a user with a low to reasonable knowledge of
accounting would comprehend

5. © Michael Allison. Author’s permission required for external use.
Understandability
 How can understandability be achieved?
 Avoid jargon and excessively complex terms
 E.g. would someone with a low to reasonable knowledge of accounting
know these terms…
 EBITDA
 Amortisation
 Goodwill
 Where possible, use simple language that is easily understood
1.5 UNDERSTANDABILITY

6. © Michael Allison. Author’s permission required for external use.
Understandability
 How can understandability be achieved?
 Use headings and formatting to make sure information is clear and readable
1.5 UNDERSTANDABILITY
Income Statement
Revenue; Sales of clothing $50,000; Sales of footwear: $45,000; Sales of equipment $15,000
Expenses; Rent $20,000; Wages $30,000; Marketing $5,000; Insurance $10,000; Electricity $15,000
Profit ????
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000

7. © Michael Allison. Author’s permission required for external use.
Understandability
 How can understandability be achieved?
 Use graphs and charts where possible
1.5 UNDERSTANDABILITY
Income Statement
Revenue $ $
Sales – Clothing 50,000
Sales – Footwear 45,000
Sales – Equipment 15,000 110,000
less Expenses
Rent 20,000
Wages 30,000
Marketing 5,000
Insurance 10,000
Electricity 15,000 80,000
Net Profit 30,000
45%
41%
14%
Sales
Sales – Clothing
Sales – Footwear
Sales – Equipment
Rent, 20,000
Wages, 30,000
Marketing, 5,000
Insurance, 10,000
Electricity, 15,000
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Expenses

8. © Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
Cambridge Revision
Question 1.5 (a) –
Understandability
X
Cambridge Revision
Question 1.5 (b) –
Understandability
X