Accounting can be divided into two main domains - financial accounting and management accounting. Each of these domains have specific users, with differing information needs and accordingly information that is useful to one group of users may not be useful to another group.
Financial accounting provides information to external users - people outside the business who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.
Management accounting provides information to internal users - people inside the business who use accounting information. Examples of internal users are owners, managers, and employees.
This blog focuses on financial accounting and meeting the information needs of external users who may not be in the position to access, almost at will, the internal financial records and information of a business and rely on external reporting by a business to meet their information needs.
Useful information refers to information that has the ability to inform and influence decisions made by a user based on that information. Information is useful if it has predictive value and confirmatory value. Predictive value helps users in predicting or anticipating future outcomes. Confirmatory value enables users to check and confirm earlier predictions or evaluations.
Owners and investors often provide the money to start a business or to expand a business. How would they decide whether it is a good investment? In making this decision, they would require information to assist them in predicting the amount of income they would earn on the investment and after making an investment they would require information to analyze how their investment is performing.
Suppliers, creditors and lenders, or other parties who the business owes money too, require information to assist them in deciding wether or not to extend credit to the business. A creditor therefore needs information to determine the businesses ability to repay their loan, such as: Does the business have the assets to generate future income? Is the business already generating sufficient income? How much credit does the business already owe? Does the business have a history of repaying creditors.
Tax authorities require information to evaluate a businesses tax situation and assist the tax authorities in calculating and confirming the tax owed to the authorities.
Economic event: Your small business is growing and you need to purchase vehicle for deliveries.
You want to report useful information on this acquisition of the vehicle.
What information about the acquisition of this vehicle may in future be of interest to a friend who you later ask to contribute an amount of money to join you as a partner in your business (in other words, be useful to your friend in making their decision to contribute their money towards your business or not)?
Some things that come to mind are: