Accounting as a Source of Information

Accounting is not just about recording numbers — it is about generating and sharing information that people use to make decisions. Every step in the accounting process, from identifying a transaction to preparing the final financial statements, produces some piece of information. But producing that information is not the end goal. The real purpose is to get that information into the hands of the people who need it, so they can act on it. That is why dissemination — the sharing of accounting information — is an essential function of accounting.

For accounting information to be useful, it must serve several specific purposes. It should help users make economic decisions. It should serve those who rely on financial statements as their main source of information about a business. It should help predict and evaluate the amount, timing, and uncertainty of future cash flows. It should allow users to judge how effectively management is using the business’s resources to meet its goals. It should provide both factual and interpretative information, and where the information involves interpretation, evaluation, prediction, or estimation, the underlying assumptions must be disclosed. Finally, it should also provide information about the business’s activities that affect society.

Users of Accounting Information

Users of accounting information fall into two broad groups: internal users and external users.

• Internal users are the people inside the business entity — managers, owners, and employees. They need information for planning, controlling, and running day-to-day operations.
• External users are groups outside the business entity who use the information to make decisions about it. These include investors, creditors (like banks), government agencies, customers, and the public. For example, a bank would use a business’s financial report to decide whether the business is eligible for a loan.

The different needs of these two groups have led to the development of three sub-disciplines within accounting: financial accounting, cost accounting, and management accounting.

Financial Accounting

Financial accounting is about keeping a systematic record of financial transactions and then preparing and presenting financial reports. Its goal is to measure the organisation’s success and financial soundness. It relates to the past — it reports what has already happened. It serves the stewardship function, meaning it shows how well management has taken care of the resources entrusted to it. It is monetary in nature, meaning it records only those events that can be expressed in money terms. Financial accounting is primarily concerned with providing financial information to all stakeholders — both internal and external.

Cost Accounting

Cost accounting helps analyse the expenditure of the firm. Its main job is to ascertain the cost of each product manufactured or each service rendered. Once the cost is known, the firm can fix appropriate prices. Cost accounting also helps in controlling costs and provides the costing information that management needs for decision-making.

Management Accounting

Management accounting provides accounting information to people within the organisation — the management — to help them in decision-making, planning, and controlling business operations. It draws relevant information mainly from financial accounting and cost accounting. This information helps management in budgeting, assessing profitability, taking pricing decisions, and making capital expenditure decisions. But management accounting goes beyond just financial numbers. It also generates other information — both quantitative and qualitative, financial and non-financial — that relates to the future and is relevant for decision-making. Examples of such information include:

• Sales forecasts
• Cash flow projections
• Purchase requirements
• Manpower needs
• Environmental data about effects on air, water, land, natural resources, flora, fauna, and human health
• Information about social responsibilities …