To speak about accounting and management, we must begin by defining accounting as a language — the language of the business world. This is due, in principle, to the objective of accounting, which is to describe what has happened in a company or organisation in the past and what its current situation is from a financial point of view in the light of that past.
In 1966 the American Accounting Association defined accounting as the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of that information. The economic concept implicit in the preceding sentence implies that accounting deals with those situations in which a choice must be made under a scarcity of resources. The word “measure” includes the choice of an accounting method — such as FIFO or deferred taxes — to measure profit.
It is important to stress that, according to the above definition, accounting is not only about describing past events; it is also about making estimates, about predicting to some extent. This means that the information must be prepared in a way that is directly useful for decision-making, which is why the way the prepared information is presented takes on such importance.
Who are the users of accounting information?
As already suggested by the title “accounting and management”, accounting as a decision-making tool is a key element for management. In the first place, because it is essential that those responsible for running the company — that is, its management staff — know what is happening, so that they can anticipate the future on the basis of that information with a view to the proper functioning of the organisation.
The company’s own shareholders are also interested, so that, with the accounting data in hand, they can approve or reject the directors’ management — since they are in fact the owners of the company — or decide whether to sell their shares or buy more depending on the results and the general performance of the business.
In the same way, potential shareholders — that is, the capital market in general — may seek to obtain information about a company before taking a possible buying decision. The body of actual and potential shareholders, once organised, constitutes the stock exchange, which is in fact the institution that has most influenced accounting practices.
Likewise, the creditors of an organisation will be interested in information about it, whether they are creditors as suppliers or as lenders — that is, banks and financial institutions.
Moreover, the employees who provide their services in companies or organisations increasingly demand a greater and more complete explanation of their performance and situation.
Another group would be made up of customers. Continuity of supply, the reliability and economic stability of the company, and the likelihood that the contracts established between the organisation and its customers will be fulfilled, may be decisive criteria in purchasing decisions — although this point usually arises only in extreme cases.
Finally, in the relationship between accounting and management, there are governments, which are extremely interested in the information coming from companies for two reasons: because the general performance of companies is important for the stability and welfare of the country, and because in almost every country the government takes a share of the profits that companies generate — and to do so it must know the amount of that profit and the way in which it has been determined.
