Accounting is concerned with collecting, analysing and communicating financial information. The purpose is to help people who use this information to make more informed decisions. If the financial information that is communicated is not capable of improving the quality of decisions made, there would be no point in producing it. Sometimes the impression is given that the purpose of accounting is simply to prepare financial reports on a regular basis. While it is true that accountants undertake this kind of work, it does not represent an end in itself. The ultimate purpose of the accountant’s work is to give people better financial information on which to base their decisions. This decision-making perspective of accounting fits in with the theme of this book and shapes the way in which we deal with each topic.
Who are the users of accounting information?
For accounting information to be useful, the accountant must be clear for whom the information is being prepared and for what purpose the information will be used. There are likely to be various groups of people (known as ‘user groups’) with an interest in a particular organisation, in the sense of needing to make decisions about it. For the typical private-sector business, the more important of these groups are shown in Figure 1.1. Take a look at this figure and then try Activity 1.1.
2 CHAPTER 1 INTRODUCTION TO ACCOUNTING
Several user groups have an interest in accounting information relating to a business. The majority of these are outside the business but, nevertheless, have a stake in it. This is not meant to be an exhaustive list of potential users; however, the groups identified are normally the most important.
Fig➔ Main users of financial information relating to a business
WHO ARE THE USERS OF ACCOUNTING INFORMATION? 3
Ptarmigan Insurance plc (PI) is a large motor insurance business. Taking the user groups identified in Figure 1.1, suggest, for each group, the sorts of decisions likely to be made about PI and the factors to be taken into account when making these decisions.
Your answer may be along the following lines:
User group Decision
Customers: Whether to take further motor policies with PI. This might involve an assessment of PI’s ability to continue in business and to meet their needs, particularly in respect of any insurance claims made.
Competitors: How best to compete against PI or, perhaps, whether to leave the market on the grounds that it is not possible to compete profitably with PI. This might involve competitors using PI’s performance in various aspects as a ‘benchmark’ when evaluating their own performance. They might also try to assess PI’s financial strength and to identify significant changes that may signal PI’s future actions (for example, raising funds as a prelude to market expansion).
Employees: Whether to continue working for PI and, if so, whether to demand higher rewards for doing so. The future plans, profits and financial strength of the business are likely to be of particular interest when making these decisions.
Government: Whether PI should pay tax and, if so, how much, whether it complies with agreed pricing policies, whether financial support is needed and so on. In making these decisions an assessment of its profits, sales revenues and financial strength would be made.
Community: Whether to allow PI to expand its premises and/or whether to provide representatives economic support for the business. PI’s ability to continue to provide employment for the community, the extent to which it is likely to use community resources and its likely willingness to help fund environmental improvements are likely to be considered when arriving at such decisions.
Investment: Whether to advise clients to invest in PI. This would involve an analysts assessment of the likely risks and future returns associated with PI.
Suppliers: Whether to continue to supply PI and, if so, whether to supply on…