Understanding accounting

Accounting practice is the process of identifying, measuring and communicating economic information so that people can make informed decisions. Identifying means deciding which events are financial transactions that belong in an entity's records: a sale to a customer is identified, a friendly phone call with a supplier is not. Measuring means expressing the transaction in money, usually Australian dollars, using evidence such as an invoice, receipt or bank statement.

Communicating means presenting the measured information in a form a stakeholder can use, such as a report, a dashboard or a short spoken briefing. Accounting activities are the individual actions inside that process, for example recording a cash sale, totalling weekly expenses or preparing an end-of-month report.

The role of accounting is to enable accountability, control and effective decision-making. Accountability means that people who look after resources can show how those resources were used, such as a manager explaining spending to an owner or a club treasurer reporting to members. Control means using information to keep an entity on track: comparing actual spending with a budget, spotting unusual payments, or checking that the cash recorded matches the cash banked.

Decision-making covers choices such as whether to hire staff, borrow money or change prices.

People who use accounting information are stakeholders. Internal users work inside the entity and can usually request detailed, frequent information designed for them: the owner, managers and staff responsible for a budget. External users are outside the entity and rely on the reports they are given: banks and other lenders, suppliers offering credit, customers, government agencies, potential investors and community members. Their needs differ.

A lender mainly wants evidence that a loan can be repaid; a supplier wants to know whether accounts are paid on time; an owner wants to know whether the business is profitable and where money is being spent.

Preparing information is never ethically neutral. A preparer might be tempted to leave out an unpaid bill so the business looks healthier, or to delay recording an expense until a loan is approved. Stakeholders depend on honest, complete information, so the ethical implications of what is included, how it is described and who receives it must be considered alongside what the stakeholder asked for.