Relevance in accounting

Accounting information is relevant (“accounting relevance”) when it is capable of making a difference in a decision.

Suppose that you’re trying to decide what to eat for dinner: A hamburger? Or a salad? What information is relevant to your decision? The number of calories? The price of each meal, perhaps? Do you have the food ready to make, or do you need to run to the store? All of this accounting relevance will help you to decide what to eat.

On the other hand, some information is not relevant. You decided to wear blue shoes today. Not relevant.

In accounting, information is used to make investment decisions – and investors who use that accounting information are interested in predicting future income, interest payments, principal payments, and dividend payments. Accounting relevance helps them to make these decisions, while irrelevant information does not. Here are three specific attributes of relevant information:

  1. Relevant information has predictive value. It helps investors to predict what will happen in the future.
  2. Relevant information has confirmatory value. It helps investors to assess the predictions, and therefore to improve their skills at making predictions.
  3. Relevant information is material. If you didn’t know about it, you might make a mistake.